By Tom Wickers, Hottinger Investment Management
Throughout the Brexit process, where uncertainty has been rife in the UK economy, one juggernaut contributor to growth has continually outdone economists’ gloomy outlooks: consumer spending. Against the backdrop of a recent lull in consumption growth, which languished at 1.5% in October[1], and with low expectations on Christmas spending, now seems an appropriate time to evaluate why consumer spending has repeatedly chugged on through adversity.
If the phrase ‘strong consumer spending props up economic growth’ does not sound familiar, a glance at UK figures for Q4 2016[2], Q3 2017[3], and even March this year prior to the original Brexit deadline[4] should provide just a few domestic examples of this actuality that has been continually demonstrated globally. In December 2017, Deloitte published a review of how resilient the consumer has been throughout the Brexit process[5]. It noted that consumer confidence had remained high despite uncertainty over future relations with Europe and a generally sombre economic outlook. Since then, the situation has changed very little. At the time of the Brexit referendum in Q2 2016, consumer confidence held at -8% [Figure 1], significantly higher than in the years following the Great Financial Recession, and has largely continued at this high level. The inference here is that concerns for the overall economy have not translated into concerns of consumers over their individual job security and financial position. Low unemployment and high real wage growth are the fundamental drivers of the high confidence that workers have experienced of late. Real wages grew by an annualised 2.1% in the third quarter and the unemployment rate remains at 3.9%, which is half its 2010 figure. The reality is that those with low incomes have dramatically increased their consumption as they have a higher marginal propensity to consume than higher earners[6] – this is reflected in an increase in net spending on essential goods of 5% between the end of 2015 and the end of 2017[7].
Figure 1: The history of the Deloitte Consumer Confidence Index from 2012[8]. The Deloitte Consumer Confidence Index compiles factors such as confidence in household income, job security and debt levels to give an aggregated confidence indicator.
Another compelling explanation for the resilience of consumer spending is found in the historical precedent provided by a breakdown of US GDP[9]. Since 1952, consumer spending has only decreased four times outside of a recession, two of which were shortly following a recession and one of which was immediately preceding a recession. Based on these figures, even those that are particularly bearish on markets should expect consumer spending to contribute to growth. In the three quarters prior to the ten recessions over this period, consumer spending contributed an annualised average of 1.00% to real GDP growth, while investment detracted 0.14%. This further demonstrates the robustness of consumer spending and might also suggest there is a disparity between consumers’ and business’ ability to process the economic outlook.
Some economists are suggesting consumers are spending even more than they would historically, given the prevailing market conditions. From the surge in contactless payments[10] to the increasing effectiveness of targeted advertising[11] in recent years, the way in which consumers find and buy goods is changing and (it is argued) that is making them spend more than previously. The surge of internet sales provides some insight into the speed of purchasing changes. Online sales as a proportion of total retail sales have increased to 2.4x the 2010 level, with online sales providing even more preference data and convenience[12]. However, it is difficult to prove whether the rise of internet sales or contactless purchases has contributed to new spending growth or has purely acted as a substitute for growth in other retail areas. What can be evaluated is whether the UK populace is spending at unsustainable levels, which would suggest that there is some new factor encouraging higher consumption. Two key indicators of whether the population is spending too much are if debt is unusually high and if savings are atypically low. The most recent figure on household debt-to-GDP ratios remains muted at 86.6%[13], down from an all-time high of 96% in 2010, reflecting a more cautious consumer compared to pre-crisis levels. On the other hand, the household savings ratio fell to its lowest annual level in 2017 since 1971, still trending low in 2018 at 6.1%. The recent savings ratio has been a key figure behind several articles detailing that the average person is not saving enough, particularly when it comes to pensions[14]. The danger here is that consumers will have to compensate with a heavy period of saving at some point in the future to assure their family and elderly livelihoods. Failing that, the economy would suffer from a frightening level of pensioner poverty in the long run.
Figure 2: UK historic Household Saving Ratio, as given by ONS data[15].
Throughout a highly uncertain period, consumer spending has been a knight in shining armour for the UK economy. Now, as it catches its breath, it would seem foolhardy given historical figures to presume that spending will falter altogether. That said, if consumption were to carry on heedless of savings as it has done in recent years, the UK’s long-term economic health would suffer. However, it is unlikely that long-termism will cross the minds of the hordes of shoppers during the festive season.
References:
[1] https://news.sky.com/story/uk-consumer-spending-grows-1-5-in-october-11854379
[2] https://www.businessinsider.com/brexit-aftermath-uk-gdp-q4-2017-1?r=US&IR=T
[3] https://tradingeconomics.com/articles/10252017085124.htm
[4] https://uk.reuters.com/article/uk-britain-economy-retail/uk-consumers-keep-calm-and-carry-on-shopping-before-brexit-deadline-idUKKCN1RU0TU
[5] https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/consumer-business/deloitte-uk-the-deloitte-consumer-review-the-brexit-consumer.pdf
[6] https://www.bostonfed.org/publications/research-department-working-paper/2019/estimating-the-marginal-propensity-to-consume-using-the-distributions-income-consumption-wealth.aspx
[7] https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/consumer-business/deloitte-uk-Consumer-Tracker-Q2-2019-hs5v1.pdf
[8] https://www2.deloitte.com/uk/en/pages/consumer-business/articles/consumer-tracker.html
[9] https://research.stlouisfed.org/datatrends/net/page6.php
[10] https://www.ft.com/content/77144eec-fd3e-11e7-9bfc-052cbba03425
[11] https://www.researchgate.net/publication/254008753_How_effective_is_targeted_advertising
[12] https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/october2019
[13] https://tradingeconomics.com/united-kingdom/households-debt-to-gdp
[14] https://www.unbiased.co.uk/news/financial-adviser/people-pay-less-into-pensions
[15] https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/dgd8/ukea
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