UK Household Spending to Drop to 1.6% in Coming Years
Analysts Paint Grim Picture of Future UK Household Expenditure
The March budget of the UK government is going to contain a significant amount of spending cuts. According to the UK Chancellor, George Osborne, the economy has not performed as expected, and the government will be unable to sustain current expenditure with current revenue streams. The GDP growth rate in the UK was measured at 0.5% for the 3 months ending January 2016, the unemployment rate is currently at 5.1%, and the inflation rate is at 0.3%. The UK interest-rate is identical to the US interest rate at 0.5%. However the inflation rate month on month declined by 0.8% in the UK and the consumer price index declined by 0.45 points from December 2015. Food inflation is down 2.6% and the government budget has shrunk by 4.4% of GDP. Business confidence is at a level of -4 while industrial production and manufacturing production have declined by 0.4% and 1.7% respectively. The latter figures are deeply concerning to UK economists and analysts, because they indicate a slowdown in UK economic activity.
The government is proposing spending cuts because it cannot sustain its current budget with current revenue streams. Public expenditure will be carefully scrutinised to ensure that the UK government maintains a conservative policy of expenditure. The BoE (Bank of England) has revised its wage, inflation and growth forecasts lower, and the OBR (Office of Budgetary Responsibility) has been informed to do likewise. Analysts caution that the issue is less a result of global economic weakness and more a problem of government receipts being less than what was forecast. Wage growth continues to be a thorn in the side of UK growth, and persistently sticky wages are presenting a real challenge to the economic prosperity of the country. As it stands, December’s nominal GDP (which does not take inflation into account) was at its lowest level in 7 years. The UK government’s problem is that its payments are increasing and its receipts are decreasing.
Spending cuts by households to take effect in 2017
For 2016, the combination of weak oil prices and resultant cheap petrol prices, low inflation and a relatively steady pound has helped to put more personal disposable income in the pockets of UK consumers. Bank interest rates are low at 0.5% and this facilitates easier access to credit. The problem comes in when inflation rates start to increase and this is bound to happen towards the end of 2016 and beyond. During the course of 2016, we are likely to see big-ticket purchases like cars, recreational vehicles, flats and houses taking place – but that will change when sticky wages and higher interest rates and higher inflation rates kick in. As UK banks continue to approve mortgages, so we will see the furniture industry booming. The government is anticipating that consumer expenditure will increase by 2.9 percentage points in 2016. The middle class in the UK will come under increasing pressure as inflation increases and real wages decline. But for this year, there is more leeway in household expenditure and everyone seems to be taking advantage of it.
Cuts to real household expenditure expected over the next four years
From 2017 through 2020, we are looking at household incomes growing at a real rate of approximately 1.6%, and that compares to 3% growth in 2016. Consumer spending in the UK increased the most between 1998 and 2007, followed by strong increases in 2015 and 2016 (expected increases). For the years 2017 through 2020, consumer spending is expected to grow at less than 2% per annum. As the government cuts its social welfare expenditure, we will see the biting effects of inflation negatively impacting on overall consumption expenditure. Household income will naturally get squeezed, but the UK government has ensured that state pensions will increase by 2.5% per annum (for 3 years) to meet these inflationary pressures. This will assist retirees and everyone who earns a low wage. Extrapolating over the next 10 years, the BRC (British Retail Consortium) cautioned that 1,000,000 jobs could be lost. The rising costs that business owners are expected to encounter in coming years will naturally be a drag on the performance of these companies and will invariably lead to layoffs. Small businesses continue to push for government cuts to tax rates to allow them to invest more heavily and hire more people.