UK: Deloitte Monday Briefing: The UK Consumer: Spending More, Earning Less

Last Updated: 28 October 2013
Article by Ian Stewart

Most Read Contributor in UK, August 2017

* UK consumer spending has been on a rising path for the last two years. Since the start of this year, retail sales have risen by over 4.0% and housing transactions are up by 16%. Car sales in September rose to the highest level since March 2008.

* Yet inflation and tax rises have continued to run ahead of growth in earnings. Over the last two years inflation and tax rises have outstripped earnings by 1.8%.

* The official data for real disposable income paint a rather less negative picture. This measure includes all sources of consumer income, including wages, savings, investments, pensions and benefits. On this indicator, consumer spending power has been broadly flat over the last two years.

* The disposable income data suggest that people with additional sources of income have fared better than those who are reliant on earnings. Digging into the data we find that the squeeze on real wages has been more acute in the private sector than the public sector.

* If real incomes are going sideways and, for many in work they are falling, what is driving the recovery in consumer spending?

* Consumers are certainly feeling more upbeat. In the last three months, consumer confidence has risen at the fastest rate in almost 30 years to reach the highest levels in seven years. 

* Rising equity prices and house prices have made consumers feel richer by increasing the value of their assets. Coupled with greater optimism about the economic outlook this seems to have given consumers the confidence to save less. The credit crunch caused a sharp rise in the savings ratio, pushing it to a peak of 8.6% of income. But it has since fallen and in the second quarter stood at 5.9%. Lower levels of saving are an important source of consumer spending power.

* Consumers have also been buying more on credit. The share of new cars being sold on credit reached a record high of 75% in September. More than £11 billion of credit has been advanced to new car buyers over the last year with an average loan of £14,622. Unsecured lending, which is typically used to finance consumer spending, is rising at rates last seen in early 2008. Meanwhile, the number of mortgage approvals made by banks and building societies has risen by more than 25% in the last year.

* Consumer spending power has had a significant boost from compensation payments made by the banks for the mis-selling of payment protection insurance (PPI). £12bn has been paid to consumers in PPI compensation since January 2011, a sum that could have financed the entire increase in consumer spending over the period twice over.  

* The recovery in UK consumer spending is real and broad based. But it is being driven by lower levels of saving, increased indebtedness and windfall gains from PPI compensation. These factors are unlikely to prove sustainable.

* For consumers to keep on spending earnings need to rise. Next year we expect inflation to fall, taxes to stay on hold and earnings to move higher. As a result, our guess is that 2014 will be the first year since 2009 that earnings outstrip inflation and tax changes.

* If we are wrong and the squeeze on earnings continues the consumer recovery will probably fade. With consumer spending accounting for about 60% of GDP that would deal a heavy blow to hopes of economic recovery in 2014.


UK's FTSE 100 rose by 1.5% over the week, with risk assets performing strongly at the beginning of the week on speculation of continued US monetary easing.

Here are some recent news stories that caught our eye as reflecting key economic themes:


* The UK economy grew at an annual rate of 0.8% in the third quarter of 2013, the fastest rate since Q2 2010
* The US economy added a lower than expected number of jobs in September adding to concerns about the pace of the US recovery
* Bank of England Governor Mark Carney said the Bank would offer banks money for longer periods and widen the range of assets accepted as collateral
* Brazilian business confidence dropped to the lowest level since July 2009
* The body representing the US financial services industry said it will push for more co-operation with government following a simulated cyber-attack that exposed flaws that would have resulted in the closure of the US stock market.
* The US state of Oregon is considering taxing drivers for the distance they travel rather than the petrol they consume, due to increased fuel-efficiency and lower fuel use
* The FT reported that the world's first bond backed by home rental income – bundling cash flows from homes bought by investors – could come to market soon
* Happy Days, a new musical based on the 1960s American sitcom, has become the first theatrical production to use equity crowd-funding, as it raises the money it needs to tour the UK via the Seedrs crowd-funding platform
* Cyprus announced that it plans to remove most of the capital controls it brought in earlier this year in early 2014
* The Portuguese central bank claimed that Portugal has seen its first annual growth since before its bailout in mid-2011
* Germany's Bundesbank warned that apartment prices in Germany's largest cities may be overvalued by as much as 20%, driven by loose monetary policy set by the European Central Bank
* China introduced a new benchmark lending rate – the "loan prime rate" (LPR) – set by market participants who report the lending rates they are offering clients, as a step towards liberalising interest rates
* UK listed companies will pay more than £100bn in dividends next year, surpassing the previous record by £20bn, according to analysis from Capita Asset Services
* Funding Circle, one of the UK's largest peer-to-peer lenders, is to expand in to the US market via the acquisition of a San Francisco start-up
* Just 2% of the Chinese population account for around a third of global luxury goods consumption, according to research by A.T Kearney
* UK government agencies have produced a plan to capitalise on the growing popularity of British cider in growth markets such as America, where a bottle of Aspall's cider (£2.59 in England) is sold on wine lists for as much as $26 a bottle
* A poll in French newspaper Le Monde found that more than 70% of the French feel taxes are "excessive", with 80% believing the President François Hollande's economic policy is "misguided" and "inefficient"
* The FT reported that Brevan Howard, the world's third-largest hedge fund, has moved most of its operations out of the UK to escape EU regulation and grow internationally
* The Guardian reported that a number of British supermarkets have seen rising sales of "exotic" meats such as Oxtail, lamb's hearts and beef shins as consumers look to save money on cheaper cuts and emulate celebrity chefs
* Indian government archaeologists began excavating land near an ancient temple in the village of Daundia Khera, after a popular local holy man said he dreamed 1,000 tons of gold, worth approximately $40bn, is buried there – dream team

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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