Our outlook for the UK consumer

The first thing to acknowledge is that the last two years has been tough for businesses in this segment of the UK economy. There has been no growth in the price-adjusted volume of consumer spending since early 2022. Over the prior two decades that measure has seen average growth of 1.5% per year. That is a big difference. All the volume growth in goods and services sales has been eaten up by the pick-up of price inflation. Extraordinarily retailers sold less in the second quarter of 2024 than they did in Q2 2019 before the COVID-19 pandemic hit. The value of what retailers sold was, by contrast, 20% higher. Profit margins have been squeezed by higher energy and labour costs even as retailers innovated, and excess retail capacity has drained from the market. However this is also - to give a fairer counterfactual - a story of remarkable resilience to what could have been truly dire. Consumers were expected to slam their wallets and purses shut as the price of rents, mortgages, food and energy moved higher. Unemployment was expected to rise sharply to more than 6.5% of the UK working age population. That rate remains at just 4.2%. The Bank of England forecast the longest recession in one hundred years rather than the shallow pullback experienced in late 2023. That acute economic pain was averted partly due to good fortune as global energy prices pulled back. But it was also notable that consumer spending displayed a robustness - particularly for travel and leisure items. That robustness means - as the tables now turn on inflation - the UK business community is wondering how consumers might respond.

There are some well-documented positive signs. Consumer confidence is hovering around a three-year high. Almost two-thirds of consumers now report they will spend the same or more in the last quarter of the year - a big increase on the last two years. The first interest rate cut from the Bank of England should be followed by more in the coming months, whilst mortgage deals are now being offered below the symbolically important 4% interest rate. Surveyors are now reporting expected rent increases at their lowest level since January 2021. Food inflation having hit 19% a year in March 2023, is now down to just 1.4% over the last 12 months. Wages have been growing faster than prices for more than a year. Even house price growth is now outstripping overall inflation, albeit the average price of a UK house has fallen by more than 10% in real terms since August 2022. If this was the totality of the picture then consumer-facing businesses should be gearing up for a bumper final quarter, and a further recovery in 2025.
But there are also reasons for caution. In recent meetings with companies and investors I have picked up a palpable fear of what is now coming at the 30 October Budget. Government messaging designed to achieve a political goal now risks having an economic blowback. Whilst most businesses acknowledge the need to fund public services correctly - and that this can be growth-enhancing - the job becomes decisively harder if consumers spend less and businesses pull back on investing. The hope is that the mood music changes the other side of the Budget, and someone in the Treasury dusts off their D:REAM LP in time for the Christmas Party.

Some economists scoff at the idea that the messaging matters. And in normal times I hold that view. However this is far from a normal economic time. UK households - mainly richer and older ones - are saving almost 3p in the £1 more than their normal rate. If these households anticipate that they are the likely target of significant tax increases that rate will rise further. The other reasons for caution include global container rates and gas prices. These have both begun to nudge higher. Whilst the prices of consumer goods and household fuel are both currently falling this looks unlikely to hold into 2025.

But these risks aside I remain optimistic. UK households are sitting on £1.8 trillion of cash, roughly the same amount as they hold in mortgage, loan and credit card debt. In aggregate they are net debt zero. And whilst this cash and debt is unequally distributed amongst the UK’s 30 million households, this is a far more robust financial footing than in 2008 when households had £1.5 trillion of cash but £2.2 trillion of debt. The story of the last fifteen years that so rarely gets told is that UK consumers have been deleveraging. It was one of the major contributors to modest growth over that period. However, as a basis for spending going forward this reduced debt it is a good news story. And whilst the government has copped plenty of flack for its handling of public sector pay disputes - indeed the absence of public sector productivity for 25 years is a national scandal - consumers will undoubtedly benefit from getting to work on time, or a timelier hospital appointment.

So the Golden Quarter looms large with plenty of promise, but also with reasons for caution. It is perhaps ever thus. But for the first time since 2018 it looks set to be a quarter unadorned with a General Election, a pandemic, or very high inflation. Consumers might just see that as reason to splash the cash. Economic policymakers and business owners will certainly hope so.