Room to breathe
17 April 2018
Consumer spending ended 2017 on a rather subdued note with consumption up just 0.3%q/q in Q4, in line with the average growth rate delivered over the year as a whole, and well below the 0.7% achieved in 2016. However, the consumer is likely to breathe a sigh of relief moving into 2018 as real income pressures begin to finally alleviate. Headline inflation slowed to 2.7% y/y in February, with the 6-month annualised rate of change slowing to 2.1%, helped by a softening of services inflation to 0.2% (6-month annualised). Households have weathered sterling-induced inflationary pressures in the wake of the Brexit vote by saving less, with the savings rate down to multiyear lows of 3.9% in mid-17. As the temporary effects of currency pass-through to domestic inflation fade, price growth will be increasingly determined by domestic cost pressures and margin behaviour. The latter will be particularly important in determining the evolution of real incomes.
With these in mind, we have been seeing improvements in both nominal and real disposable incomes, which grew 3.3% and 1.5% on the year respectively in the fourth quarter. Nominal earnings have been boosted by rising average weekly earnings, which continue to improve, with the 3-month moving average versus the year prior growing at a rate of 2.8% in January. Moreover, total hours worked continue to grow, helping to boost aggregate incomes, albeit at a slightly slower rate. Yet, the partial indicators of consumer spending have been mixed. Retail sales started the year on a weak footing, contracting 4% in 3-month annualised terms in February following two weak prints in December and January. Additionally, although a volatile measure, new car registrations while strong in January and February, have softened notably in March, contracting 13% on the month (see Chart 4). We are cautious on the extent to which the recent spell of unusually bad weather in the UK could likely have affected consumption patterns in the first quarter.
Consumer sentiment indicators are also sending mixed messages, with headline consumer confidence appearing soft. However, delving into the detail, the driver of this weakness is the expectations for the broad economic environment component, rather than responses on households’ individual financial situation, with the latter likely the more important driver of spending decisions. In recent months, consumer intentions to make major purchases have improved, pushing into positive territory again, but there has also been a sustained increase in intentions to save. The release of the Bank of England’s credit conditions survey last week indicated that the supply of credit to households was further tightened in the first quarter, especially on the unsecured lending side, an important source of funding for the short-term spending of consumers (see Chart 5). This decline in the provision of unsecured lending was also met with a declining demand for credit from households, with risk appetites seemingly abating on both sides in the quarter. Overall, the outlook for the UK consumer will be determined by how the balance between inflation, income growth and credit availability play out. A fading inflation squeeze will provide households with a little more room to spend, although this may be restrained by lukewarm confidence and tightening credit conditions.