U.K. Consumer Boom Set to Flag as Brexit Ignites Inflation

Reading Between the Lines of Post-Brexit Data
  • Tumbling pound threatens two years of real-wage growth
  • GDP data on Friday will likely show consumption spurred growth

For U.K. consumers, the good times might not keep rolling.

Quickening inflation looks set to erode almost two years of real-wage growth, undermining the key driver of the economy. Data due Friday will probably show consumption helped growth accelerate to 0.6 percent in the second quarter, before the referendum on European Union membership.

Still, there are challenges ahead for households. The pound’s 10 percent drop since the June 23 vote is already pushing up the price of imports, and a gauge of expectations for prices over the next decade is at a nine-month high.

Some economists see inflation accelerating above 3 percent next year, eroding the spending power of British households. Businesses may already be feeling the Brexit effect, with economists predicting firms scaled back spending last quarter.

Bank of England projections for inflation to reach 1.9 percent next year leave real-wage growth at about 1 percent in the fourth quarter of 2017, down from as much as 3.2 percent last year. If the more aggressive inflation forecasts of the National Institute of Economic and Social Research prove correct, real pay may turn negative for the first time since 2014.

“Consumer spending and investment are the clear losers” in the post-Brexit environment, said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “Higher inflation will erode purchasing power, and if you’re worried about your job, the likelihood is that you’ll start to save more. Plus there will probably be a rise in unemployment.”

While retail sales had their best July for 14 years, official figures may not yet be capturing consumer anxiety, Buckley said. ONS Chief Economist Joe Grice has cautioned that it’s too early to know the precise impact of the referendum on economic activity. 

A hot summer and tourism boosted by the decline in the pound may have enticed enough shoppers to beat somber expectations for this month at least, according to the Confederation of British Industry. Sales were higher than last August, 35 percent of retailers surveyed said, while around a quarter said they were down. Internet sales growth also accelerated.

Even so, weaker sterling “is likely to push up the price of imported goods over time, which will mean households will be more likely to rein back spending on non-essentials,” said Anna Leach, head of economic analysis and surveys at the CBI.

The BOE slashed its 2017 growth forecast to just 0.8 percent from 2.3 percent on Aug. 4 and predicted unemployment will reach almost 6 percent by 2018. Officials reduced their benchmark interest rate to 0.25 percent in August and a majority expect another reduction if the data deteriorates in line with their central forecast.

“The household sector has been holding up pretty well for now,” said Chris Hare, an economist at Investec in London. “There are two things we see happening: businesses will invest less and hire fewer people, which is bad for households, and also higher inflation, given the fall in the pound, will weigh on real take-home pay.”

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