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UK
CONSUMER SPENDING WEAKENS WE SUGGEST: Consumer growth at just 1% in 2008. SUMMARY: The latest BRC survey adds to growing evidence which suggests the UK economy is set to slow sharply. An end to the borrow-and-spend consumer habit is likely as credit conditions tighten and the housing market deteriorates. According to data released today by the British Retail Consortium, concerns of a weakening in UK consumer spending appear to be justified. Over the year to December, the value of retail sales increased by just 2.3% - below the market forecast of 2.9%. On a like-for-like basis, the annual rise was just 0.3% compared to 2.5% in December 2006, making it the worst December figures since 2004. The BRC survey data, a leading indicator, comes on top of a recent profit warning from DSG – owner of Currys and PC World and weak actual sales data from the clothing company Next. Marks and Spencer’s and J Sainsbury’s are due to publish their Christmas trading figures later this week with the market anticipating poor results.
It seems 2008 will be a difficult year for British retailers. Signs of a deterioration in the housing market, which will ultimately affect consumer sentiment and households’ ability to borrow, have already emerged. New mortgage approvals, a leading indicator of the housing market, fell once again in November, to 83,000, down from 89,000 the month before. In fact, house prices have started to fall. Nationwide and Rightmove both reported falling house prices (on a month-on-month basis) in November and December. And whilst December figures from Halifax, out today, report a 1.3% monthly rise, house prices overall in Q4 were 0.8% lower than in Q3. Compared with a year ago, house prices are up just 5.2%. With house prices now in unaffordable territory, according to our affordability indicator, we expect annual house price falls of 3-4% in 2008.
As housing wealth falls, demand for credit is likely to slow. Furthermore, as the liquidity crunch turns into a credit crunch, the supply of credit to households should also wane. Last week’s credit conditions survey from the Bank of England suggested that this is already happening and ultimately, this will help put an end to the UK consumer’s borrow-and spend habit. And whilst some of the recent pick up in inflation may filter through into wage deals in the private sector in coming months, below-trend growth should create some slack in the labour market later in the year, depressing future income growth. In fact, talks are already underway to curb increases in public sector wages this year (no more than 2% according to Prime Minister Gordon Brown), which will represent a cut in real wages. Altogether, the outlook for the consumer is bleak. Our forecast is for private consumption to rise by 1% this year – the slowest rate in fifteen years. Meanwhile, businesses, faced with weaker consumer demand, are unlikely to engage in a spending spree. Expect year-on-year GDP growth of just 1% by the end of the year.
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