Forecasting Eye 

 

Higher pay means higher disposable income, leaving consumers with more to spend – or so the logic goes. Following this line of thinking, one would expect the current buoyancy of the labour market to boost household expenditure. Yet, this has hardly been the case, with household spending up by just 1.1% in Q1 2019, versus average quarterly growth of 2.2% in 2017 and 1.8% in 2018.

 

In the period between Q1 2012 and Q3 2014, nominal earnings were in decline. Yet, household consumption continued to grow at stable rates. The answer to this apparent contradiction lies in consumer credit. Clearly, households were borrowing to maintain their expenditure, rather than sacrificing their lifestyles. From Q3 2012, growth in consumer credit began to rise sharply – the rate of annual growth went from -0.3% in Q3 2012 to a peak of 10.7% in Q4 2016.

 

The opposite trend was observed in the period between Q4 2017 and Q4 2018. While wages were increasing, growth in household consumption dropped 0.3 percentage points to 1.7% during the time period. The fall in household spending mirrored the decline in credit, as consumers began to pay off their liabilities rather than add to their debt levels. Consumer credit growth was down from 9.5% in Q4 2017, to 7.0% in Q4 2018.

 

Cebr believes that the most likely interest rate scenario will see the Bank of England maintain interest rates at their current level for much of 2019, beginning to tighten monetary policy at the end of this year at the earliest. Assuming also that there are no substantial shocks to consumer confidence, we anticipate household consumption will grow by 2.4% over H2 2019 and 1.8% in 2020 as a whole.

 

A more subdued scenario would see the Bank of England increase interest rates sooner and faster, perhaps as a result of import driven inflation which might occur should the pound weaken suddenly as a result of political or Brexit turmoil. The higher interest rates would have a knock on impact on willingness to borrow, seeing rates of consumer credit growth decline even more rapidly than they are at the moment. Under this scenario household consumption growth would stand at just 1.0% in H2 2019 and 0.4% in 2020.

 

Cumulatively, this would mean that household consumption could be in for a £41 billion hit over the remainder of 2019 and 2020, should the Bank of England be forced to raise interest rates more rapidly than it currently plans. This may spell further trouble for the already struggling high street, and therefore for the UK economy more broadly.

Contact: Marina Mensah-Afoakwah mmensah-afoakwah@cebr.com ; 0207 324 2874