U.K. Consumer Back in Spotlight as Wages, Inflation DivergeBy and
Retail sales have weakened as weaker pound boosts inflation
EY Item Club forecasts a slowdown in household spending
U.K. consumers, touted by Mark Carney as a key to the economy’s performance, may find the squeeze on their pockets gets a little tighter this week.
While inflation’s acceleration probably paused in March -- partly due to the timing of Easter -- another weakening in wage growth means pay isn’t keeping pace with price increases. That’s all going to feed into household spending habits in 2017, and there are already signs of a slowdown. According to a Visa index published Monday, consumer-expenditure growth in the first quarter was the weakest in more than three years.
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The inflation and wage numbers due this week reflect the two sides of the debate among Bank of England policy makers including Carney, the governor. Price growth is already above the BOE’s 2 percent target, and Kristin Forbes voted for a rate increase last month because of the view that it will stay there for at least three years. For the majority, however, weak wages mean domestic price pressures aren’t building and there’s no need to rush into tightening.
Carney said last week that the strength of household spending has been one reason for the economy’s growth in the second half of 2016. But, echoing his dovish colleague Gertjan Vlieghe, he also said there have been some signs of a slowdown. Retail sales have plunged in the past three months and consumer confidence has been on a downward trend since early 2016.
“Worrying for U.K. growth prospects, the fundamentals for consumers look odds-on to weaken markedly further over the coming months as rising inflation eats further into purchasing power,” said Howard Archer, chief U.K. economist at IHS Markit in London.
The inflation pickup is being fueled by the pound’s decline following the Brexit vote and the effects are being felt by consumers already. A period of food-price deflation has come to an end, and Pernod Ricard SA, whose brands include Absolut vodka and Martell cognac, is raising prices in the U.K. to offset the depreciation.
The EY Item Club on Monday forecast that U.K. gross domestic product will rise 1.8 percent this year, matching the pace seen in 2016. That said, the composition of the expansion will shift, with consumer spending growth dropping to 2 percent from 2.8 percent and exports picking up, it said.
The National Institute of Economic and Social Research estimates that first-quarter GDP weakened to 0.5 percent from 0.7 percent in the final three months of 2016. The median forecast of economists surveyed by Bloomberg is for 0.4 percent, with 0.3 percent seen this quarter.
“A key component of this moderation has been relatively weak retail sales in the first two months of this year,” said James Warren, a research fellow at Niesr. “Consumption is expected to moderate further.”
— With assistance by Scott Hamilton