Too early to predict if Brexit has hit consumer spending
In the immediate aftershock of the vote to leave the European Union a raft of surveys were pointing towards a severe economic downturn, if not yet in reality, most definitely in sentiment. Business sentiment surveys and consumer confidence surveys were in agreement that the future looked bleak.
A poll by market researchers GfK recorded the biggest slide in consumer confidence for more than 26 years in July. The group said people were on average gloomier about their own finances, the broader economy and whether now was a good time to make big purchases such as furniture and household appliances.
The truth is that it’s too early to make predictions about changes in consumer behaviour. For all the uncertainty, we still need to buy groceries, we still went to the pub to watch Euro 2016, and summer holidays were likely booked long in advance of the EU vote. In the short-term at least, everyday spending is unlikely to change dramatically.
But uncertainty will still have an effect on behaviour. Anyone thinking of buying a new house or a car will probably pause and revisit their thinking: is now the right time to be making a major financial commitment?
Taking all of this into consideration, the Bank of England moved to stave off a recession. It made the correct call but we will not know the success or otherwise of the Bank’s move for some time to come. The interest rate cut, and injection of money into the economy, cannot happen in isolation. We also need a positive plan for Brexit from the government, and we consumers have a role to play. Have we heeded the message?
This past week brought the first consumer spending data since the referendum result with Visa’s UK consumer spending index. Given that Visa cards account for £1 in every £3 spent in the UK, the Visa consumer spending stats provide a robust assessment of consumer behaviour from month to month. Despite consumer confidence surveys indicating fragility, UK consumer expenditure increased by 1.6% in July, faster than the growth in May (+0.8%) and June (+0.9%), but slower than the first quarter of the year when growth was close to 2.5%. I should note that the figures strip out the effects of inflation so the weaker pound, and its impact on the price of imports shouldn’t be skewing these figures.
Across the monitored sectors hotels, restaurants and bars saw the greatest increase, rising by 8.9%. This was driven in part by warmer weather and the Euro 2016 football tournament. Increases in other sectors were recorded in recreation and leisure, beverages and tobacco and clothing. Perhaps offering a glimmer of hope for high streets, face to face spending rose for the first time in three months, albeit at a slower rate than the growth in online retail. So, we have increased our spending, but is there enough in the tank to keep it going? Perhaps. Average annual wages have been increasing by about 2% annually since a declining of close to 3% in 2010.
I have been delving deeper into consumer spending patterns recently, thanks to research that I have been supporting the Consumer Council with. As a result we now have data for average weekly expenditure by NI consumers across income groups. The Northern Ireland average weekly expenditure is £431 a week, just below twice the average weekly expenditure of the lowest group. Expenditure among the highest group, at £758 a week, is more than three times the level of the lowest income group.
The average weekly spending profiles of these income groups also show some clear distinctions and prompt questions over the scope for consumers to boost the economy. For example, among low income consumers, there is a marked difference between the proportion of income spent on ‘essential’ or ‘inescapable’ costs such as housing, fuel and power (17% of their weekly spend) compared to the average for all consumers (12% of their weekly spend).
This expenditure on essential items by lowest income groups comes at the expense of items such as transport, and recreation and culture expenditure. Low income consumers here also devote more of their income to credit charges and in cash terms aren’t actually far off the average weekly spend for all consumers (£11.50 a week compared to £14 a week).
So the big question for retailers is how much ‘spare’ cash is there? Asda’s income tracker, which measures discretionary income levels or family spending power, sheds some light on that and suggests we may not have much scope for a spending splurge. Northern Ireland has the lowest levels of UK discretionary spend, £103 a week. This is about half the level of the UK average. That said, the figure has been increasing steadily.
While consumers are displaying signs of low confidence, early data results and these improving personal finances do provide some reassurance that consumers can provide some support in navigating these uncertain times.
In next week’s Economy Watch, we hear from Ulster Bank chief economist Richard Ramsey