EconoMonitor

RGE Analysts

Grim Outlook for Consumption Spending in the UK

According to data released by the Office for National Statistics (ONS), private spending in the UK decreased by 0.1% q/q in Q4 compared with a 0.1% increase in the previous quarter. Furthermore, for February, the CBI retail survey showed a big decline in the volume of reported sales to 6 from 37. In comparison, for most of 2010, the balance was above the historical average of approximately 20. The underlying message from this survey and the ONS data remains that retail spending growth is weak and below its historical average. So, what is the outlook for consumer spending?

Consumer Spending (q/q, %), Savings Ratio (%) and Gross Disposable Income (y/y, %)

image001_512_94.jpg

Source: ONS, RGE

We expect consumer demand, which accounts for approximately 65% of GDP, to be subdued in 2011. A vicious cycle exists in the UK—economic growth is dependent upon consumer spending (correlation of 1.0), but British consumers tend to rein in spending at times of waning growth. The future path of private consumer demand will depend on developments in household income and savings behavior. Real disposable incomes were on average stagnant between Q4 2007 and Q3 2010 and increases in nominal pre-tax income were more than offset by high inflation and higher taxes. The spending cuts announced in October 2010 will lead to a two-year public sector pay freeze, a fall in employment in the government sector and slower growth in benefit payments. Hence, we do not expect much of an improvement in real disposable income.

Uncertainty about future income prospects, the deleveraging process, credit constraints and the decline in house prices will incentivize households to increase their precautionary savings in 2011. To illustrate, according to Nationwide, mortgage payments for first-time home buyers account for 30% of their disposable income (the long-term average is 29%), despite the fact that interest rates are near historic lows. Furthermore, the average deposit required for purchasing a residential property with a mortgage has risen from 10% of the property’s value to 21%. (See related Critical Issue on UK output.)

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: Europe Focus: Widening French Deficit; Czech Monetary Policy; Scandinavian Inflation

Comments are closed.

Most Read | Featured | Popular

Blogger Spotlight

Dan Steinbock

Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond). In addition to his advisory activities (www.differencegroup.net), he is affiliated with major US universities as well as international think-tanks, such as India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore).

Economics Blog Aggregator

Our favorite economics blogs aggregated.