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Spend and break

18 August 2016 By George Hay

British consumers are spending, even though an economist might say they shouldn’t be. Surprisingly strong retail sales data for July seems to contradict other figures since UK voters opted to leave the European Union. Business activity in the UK’s vital services sector, for example, has fallen at its sharpest rate since 2009.

If consumers are rational, they might expect their future income to go down as Britain enters a recession, and rein in spending. But that doesn’t appear to be happening – retail sales by volume for July were up 5.9 percent year-on-year, according to the Office for National Statistics (ONS). The main contribution came from theoretically less essential non-food products.

Given 52 percent of Britons decided to ignore dire warnings of economic collapse should the UK quit the EU, consumers may just be more optimistic – despite a rate cut and increase in quantitative easing by the Bank of England on Aug. 4. Unemployment is 4.9 percent and wages are rising faster than inflation.

There’s one way in which strong retail spending could be consistent with a poor economic outlook – if consumers sense that prices might go up in the next year or so, and bring their spending forward. Recent ONS data showed businesses’ input prices in July rose 4.3 percent year-on-year, the biggest annual rate hike since 2009, driven by sterling’s post-vote depreciation. At some point, this could mean higher prices in shops, even if it hasn’t yet.

And in other ways consumers look slightly more cautious. Judging by UK consumers’ credit card activity analysed by VISA and Markit, year-on-year consumer spending growth had already started to slow from 2 percent-plus between 2014 and the first quarter of 2016 to 1.6 percent in July. The GfK gauge of consumer confidence suffered its biggest month-by-month drop since 1990, it emerged on July 29.

The point is that even if Britons do expect their incomes to be hit by a post-Brexit recession, spending ahead of a rise in prices is arguably rational. What’s less rational is to assume that Brexit won’t eventually give the British economy a headache.

 

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