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British consumers have cut spending more than almost any other industrialized country as the cost of living crisis catches up with recent data and economists’ forecasts pointing to the trend continuing into next year.
Household spending was 3.2 percent below pre-pandemic levels in the three months to September – the biggest drop ever among G7 economies and the third-worst performance among the 43 countries that published detailed national accounts data for the third quarter. FT analysis.
By contrast, in the last full quarter before the coronavirus hit, household spending rose 7 percent in the US, 2.7 percent in Canada, 1.6 percent in Japan and 0.3 percent in France, compared to the last three months of 2019.
Economists attributed the tightening of purse strings in Britain to a weak labor market, high energy bills, a worsening economic outlook and the impact of Brexit.
Paul Dales, chief UK economist at Capital Economics, said Britain’s underperformance compared to other developed economies was both “significant and worrying” and blamed it in part on the growing number of inactive workers.
UK employment was still 0.5 per cent below pre-pandemic levels in the third quarter, compared with an average increase of 2 per cent across OECD countries, including a 4.6 per cent rise in France and 3 per cent in Canada.
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In addition to a “mute recovery in employment”, Gabriela Dickens, senior UK economist at Pantheon Macroeconomics, blamed low consumer confidence in the UK and prices that “have risen to a greater extent than in the US and the level of depression in the UK and Eurozone.”
She said this was partly due to British households facing higher electricity and gas bills in the eurozone, which has benefited from greater state intervention, and in the US, where energy costs are lower.
UK energy consumer price inflation hit 59 percent in October, the highest since records began in 1989, compared with 34.9 percent in the eurozone and 17.6 percent in the US.
The UK scored 49 out of 100 in the global confidence tracker by Morning Consult published on Thursday. In contrast, the USA is 81, Canada 71 and the largest economies of the Eurozone are ranked between 54 and 65.
The impact of higher energy costs, higher interest rates and weak consumer confidence “have dampened the recovery in household spending this year,” said Yale Selfin, chief UK economist at KPMG.
The Bank of England and the Office for Budget Responsibility, the UK’s fiscal watchdog, have predicted a prolonged economic slowdown in the UK. Last month, the OECD warned that the British economy would be the worst performer among the G20 bar Russia over the next two years.
Susannah Streeter, senior investment analyst at asset manager Hargreaves Lansdowne, said the UK was lagging behind other countries as “consumers braced for a prolonged recession amid concerns that energy bills will rise again next year.”
Pantheon’s Dickens said the relative weakness in household spending was “a major contributor to the UK’s poor. [overall] performance”. The UK’s third-quarter gross domestic product was 0.4 percent lower than in the final quarter of 2019, making it the only G7 country not to have regained all the ground lost during the pandemic.
The UK’s headline measure was boosted by a lift in public spending, which was 4.7 percent above pre-pandemic levels and higher than many of its peers such as Italy, France and the US.
Dale said Brexit was also having an impact as it “impeded business investment and exports.” According to the latest data, UK exports of goods and services were lower than any other G7 country compared to pre-pandemic levels. The UK was also the worst performer in business investment, which fell by 8.4 per cent in the final quarter of 2019, while the US rose by 4 per cent.
The data “came thick and fast on the economy and, as a knock-on effect on household willingness to spend, the vote to leave the EU is having a profound effect,” said Hargreaves Lansdown’s Streeter.
More recent survey data suggests that the economic outlook is deteriorating as consumers cut spending further in the final months of 2022 as the cost of living crisis increases.
Closely watched PMI business sentiment indicators suggest the economy contracted in October and November, while the ONS bimonthly survey found the proportion of people cutting discretionary and essential spending rose over the same period.
KPMG’s Selfin warned that the softening of the labor market “could lead to higher levels of precautionary savings held by some households and contribute to further weakness in consumption.”
Streeter warned that depressed levels of consumer spending in the UK “are likely to continue for the rest of Q4 and into 2023, particularly as a higher energy price cap is introduced in the spring, putting fresh pressure on households.”
Dickens said further tightening of fiscal and monetary policy was expected to leave the UK economy “further behind its peers in 2023”.
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