While Bank of England Governor Mervyn King says an easing of the price squeeze on consumers is one of the “good pieces of news” for 2012, its impact on household spending may be muted. Unemployment has risen to the highest in 16 years, wage growth is lagging behind inflation and consumer confidence is close to a record low.
“The fall in inflation will be very largely offset,” said Michael Saunders, chief Western European economist at Citigroup in London. “Unemployment is going to rise quite sharply and the key thing will be that real incomes are still falling.”
A combination of the euro-area debt crisis, job cuts at companies from banks to retailers and the biggest fiscal squeeze since World War II is undermining sentiment among Britons. Ernst & Young’s ITEM Club has said the economy is already in a recession, while retailers such as Tesco Plc (TSCO) and Marks & Spencer Group Plc have had to cut prices to lure shoppers in what they say is a “challenging” environment.
Nationwide Building Society said today that its index of consumer confidence fell 2 points to 38 in December, close to the record low of 36 in October. Households’ assessment of the economic outlook also deteriorated.
U.K. inflation slowed to 4.2 percent in December, the weakest in six months, from 4.8 percent in November. While the Bank of England forecasts that it will cool to 1.7 percent by the end of 2012, wages may lag behind price growth for much of the year. Data yesterday showed that annual pay increases were 1.9 percent in the quarter through November.
“The economic weakness and a softer labor market mean that wages are not doing great,” said James Knightley, an economist at ING in London. “The hope that wage growth will exceed inflation this year appears optimistic.”
Compounding the squeeze on incomes are job cuts that will hit both private and public workers. Prime Minister David Cameron’s coalition is planning austerity measures through April 2017 that will involve about 700,000 job cuts.
Premier Foods Plc (<PFD>), the maker of Hovis bread, said this week it plans to eliminate 600 positions. Royal Bank of Scotland Group Plc announced 4,800 job cuts this month, while U.K. roadside restaurant chain Little Chef said it plans to close 67 locations with the loss of as many as 600 jobs. Data yesterday showed that the unemployment rate in the quarter through November rose to 8.4 percent, the highest since 1996.
Retailers’ shares have slumped as shoppers curbed spending, denting profits. Tesco, the U.K.’s largest food retailer, cut profit expectations this month after lower than expected sales. The FTSE 350 Retail Supersector Index, whose members including high street fixtures Marks & Spencer and Next Plc (NXT), has fallen 12 percent in the last six months. The benchmark FTSE 100 Index has slipped 0.9 percent in that period.
“Redundancy expectations are rising steadily in both the public and private sectors,” said Caroline Gulliver, an analyst at Execution Noble in London who has a “neutral” rating on the retail industry. “It is clear that consumers remain as cautious as they were in 2011 and the catalyst for a change in sentiment seems some way off.”
The Bank of England revived its stimulus program in October to aid the economy, boosting its bond-purchase target by 75 billion pounds ($116 billion). With those purchases due to be completed early next month, Saunders at Citigroup predicts it may add as much as another 100 billion pounds to its target in February.
“Even if growth is flat, it’s a pretty disastrous outcome as we’re looking at the worst recovery path in the last 100 years,” he said. “On fiscal policy, the government have no choice. The policy option available is that the BOE has got to do a lot more quantitative easing.”
Still, consumers may feel less badly off in 2012 than last year. Some clothing stores plan to cut prices as cotton costs ease, while Britain’s six biggest utilities announced this month that they will trim prices.
“Incomes are still squeezed, but they’re less squeezed than a year ago,” said Jens Larsen, chief European economist at RBC Capital Markets and a former Bank of England official. While “it continues to hurt, the whole mix that we had last year of higher inflation, higher taxes and public-sector layoffs is going to soften a bit.”
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