A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe to & view previous editions just google ‘Deloitte Monday Briefing’.
2018 was a tough year for British retailers. According to the Centre for Retail Research, nearly 2,600 stores closed, the highest number since 2012. Recent high-profile casualties included HMV, Patisserie Valerie and Oddbins. Along with the structural shift to online shopping, high-street retailers are under pressure from a slowdown in consumer spending growth.
Household spending has slowed since the EU referendum, with average annual growth of 3.0% in 2015 and 2016, falling to 2.2% in 2017 and 1.9% last year. It’s not just high street sales that have suffered. Car sales were 7% lower last year than in 2017, with the retreat from diesel playing an exacerbating role. House sales and mortgage lending also fell last year.
The slowdown has been caused by a fierce squeeze on consumer spending, the product of a Brexit-induced fall in sterling coupled with sluggish earnings growth. More recently uncertainty about Brexit and growth have dented consumer confidence, which is down to its lowest level in almost six years.
Housing activity has also softened. House prices are still rising, albeit by just 2.5% in the year to December, the slowest rate since July 2013. Sales volumes have fallen and the Royal Institute of Chartered Surveyors say that the outlook for the next three months is the worst for 20 years.
This all looks pretty bleak. But one important element has turned positive for consumers. Real earnings growth, which deteriorated so badly in 2017 and 2018, is heading up as the effects of a weak pound on inflation fade and as earnings accelerate.
Inflation fell to 1.8% in January, the lowest rate in more than two years and down from a peak of 3.1% just over a year ago.
And after a long period of weakness growth in average earnings has consistently outstripped inflation since the middle of last year. Given the tightness of the labour market, with unemployment close to a 43-year low, and a marked decline in net immigration from the EU, labour shortages seem likely to persist. On average economists see UK wage growth at 3.0% this year and next, comfortably outstripping inflation which is expected to remain around the 2% mark.
UK household balance sheets also look in reasonable shape. The debt-to-income ratio stands at 133%, down from 148% in 2007. While many countries, including the US and Germany, have lower debt levels, others, especially in Northern Europe, are more indebted. Total UK household debt has risen by 19% since 2010 but the value of housing and financial assets held by households has risen far faster, by around 40%. Meanwhile money is cheap and the average UK mortgage rate remains less than half of what it was ten years ago. More households have switched to fixed-rate deals.
Agreed, consumer credit growth has slowed. Part of this is a question of supply as banks have tightened lending standards. It may also reflect the fact that, with consumer incomes rising, households simply have less need to borrow.
As with many economic issues facing the UK much hinges on Brexit. A chaotic Brexit would hit sterling, fuel inflation and cause consumers to pull-back. Bank of England analysis foresees a sharp rise in inflation and unemployment in the aftermath of a chaotic Brexit. The Deloitte survey of Chief Financial Officers suggests corporates are positioning themselves for just such an outcome. Consumers take a pretty bleak view of the economic outlook and they, too, may be steeling themselves for the worst.
If there were to be more orderly outcome consumers look well-positioned to increase spending in the second half of the year. With consumption accounting for almost two-thirds of UK GDP the mood of the consumer will have a major impact on growth this year.