UK: Problems in the household consumption pattern – Deutsche Bank
|The research team a Deutsche Bank explains that since Britain’s vote to leave the EU last year, consumer spending has come into increasing focus as strong household consumption was the main reason for the UK’s robust growth performance last year which is now expected to slow as rising inflation eats into real income.
Key Quotes
“In the short term, most reliable indicators of household spending point to a sharp slowdown for Q1.”
“In the medium term, there are more channels for slowing UK consumption than just declining real wages. Other sources of household income, such as investments and benefits, are depressed by low interest rates and austerity. Employment growth, a key contributor to overall consumption growth during the recovery, is slowing and structural factors may limit the UK’s ability to generate stronger jobs growth. The household savings ratio is likely to be revised higher but has still fallen sharply as a result of declining income from investments. The ability of UK consumers to fund consumption via borrowing may be limited by tighter lending standards. UK consumer confidence has remained at robust levels but is trending lower, and Bank of England research suggests it would be very vulnerable if a Brexit-related income shock materializes.”
“There are several ways in which a soft Brexit could help UK consumer spending. A stronger exchange rate would reduce the shock of higher inflation on real incomes. A soft migration policy would mitigate some supply-side risks from employment growth. Business certainty would reduce the risk of falls in employment. Nevertheless, other factors suggest that irrespective of Brexit, strong recent consumption growth may not be sustainable in the medium term.”
“If there are multiple transmission channels, wages is the most important variable for the Bank of England. This could have silver-bullet hawkish dimensions, not only in terms of the medium-term inflation outlook, but also for offsetting the shock on incomes. The Bank of England’s current assumption is that the recovery in wage growth is back-loaded to the end of the forecast horizon. As long as this proves the case, there would seem limited prospects of a move to raise rates in the near term, given the clouds over consumer spending. We are also unconvinced that other parts of the economy will compensate for slowing consumption.”
“We continue to expect slowing household consumption growth to be the main driver of slowing GDP. This is reflected in our latest forecasts, which show private consumption growth falling to 1.6% this year from 2.8% last year and further to 1.3% in 2018.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.