Stagnant pay means UK consumers focus increasingly on essentials

Consumers’ confidence in spending has improved slightly in recent months, as employment figures improved in the UK. However, declining real wages, growing concern surrounding consumer debt levels and the Bank of England’s interest rate hike all mean that consumers are increasingly focused on essentials over luxury spending.

UK consumers continue to face a litany of economic pressures, as the British economy remains sluggish and the much anticipated divorce with the EU steadily approaches. Last month, this was compounded by the announcement that the Bank of England was to raise interest rates for the first time in more than a decade, raising the cost of borrowing for British households, which was already hurt by an earnings squeeze. The initial cut in interest rates from 0.5% to 0.25% was an emergency action taken as a precaution following the EU referendum, as the Bank sought to avert a recession.

While a slump did not materialise, the British economy appears in worse health than most other major countries, with potential to be blown further off course by faltering talks to leave the EU. As further stagnation in wages has decreased consumer spending power, increasing the reliance on borrowing once more, the measures may have further implications for the UK’s growth in the long-run.

In a new report from Deloitte, as part of its quarterly 'Consumer Tracker' series, the Big Four firm analyses the changes in consumer confidence. The study  is based on taking a net result of the replies of the survey samples’ spending behaviour from 3,000 respondents. For instance, if out of 100 respondent consumers, 30 said that they are spending more, while 40 said that they are spending less, and a further 30% said there was no change, then the net result would be that 10% of consumers report spending less.

The latest report indicates that consumers are increasingly confident about their position, with net total confidence up from -10% to -7%. Researchers contend that the improvement, against a background of continued inflationary pressure and concern about rising debt levels, reflects resilience among consumers. This is particularly in relation to improvement in employment – with unemployment reaching a low not seen since 1975, at 4.3%.

A number of areas are noted for their improvement in consumer confidence, including confidence in the level of disposable income, which improved by 3 percentage, from -24% to -21%. Essential spending, meanwhile, saw its relatively positive figure increase slightly, up from +8% to +11%. Finally, discretionary spending is reaching relative parity, up from -7% to -4% in net difference.

The latest boost represents consumers returning to a relatively stable, but net negative, outlook, which has been around since Q1 2014. Even while Brexit, and the resultant macro-economic impact, as well as longer-term post crisis monetary and fiscal (austerity) policy effects, continue to bear on consumers, net consumer confidence is up significantly on 2011.

However, the squeeze on consumer finances from inflation and the stagnation of wages, means that the latest quarter has seen consumers become increasingly defensive in their spending behaviour, while the net expansionary spending behaviour has fallen from the most recent height seen in Q4 2016.

According to the study, the effect of wages declining in real terms, as well as consumers turning to paying off unsecured debt, can be seen in the forecast of net consumer spending by category, for the coming three-month period. Small-ticket items and big-ticket items are both projected to see dips, while consumers are projected to spend more on essentials.

The authors of the report concluded, “As a result, spending has declined in discretionary categories such as electric equipment, going out and restaurants and hotels compared to last year. Consumers are expecting to spend more on essentials such as groceries, utility bills and housing in the next three months.”