LONDON — Another week brings more troubling data points that suggest Britain’s economy is starting to feel the pain of Brexit.
This week was a relatively quiet one for economic data. But there were too significant, and worrying, releases.
The first was a survey of British consumers from IHS Markit showing the biggest squeeze on spare cash in more than two and a half years. The second was the Office for National Statistic announcing a 1.8% slump in retail sales in March.
On their own, those two data points wouldn’t be catastrophic, or even that worrying. But they are part of a growing number of indicators pointing for trouble ahead for the UK economy.
Trouble comes in the form of a potentially rapid slowdown in consumer spending, as Brexit-driven inflation starts to impact the ability of British households to spend money on non-essential items — clothing, eating out, etc.
The UK economy fared better than all but the most optimistic of forecasters imagined in the immediate aftermath of the Brexit referendum, confounding predictions of an immediate recession.
“The main reason for the better than expected performance was the enduring strength of consumer spending,” Oxford Economics’ Andrew Goodwin wrote in a note on Thursday. The British public kept buying new shoes, cars, and visiting the cinema just as they had before the vote, undeterred by apocalyptic proclamations in the press. This, in term, kept the economy ticking over.
That consumer resilience looks to be coming to an end, however, as the numbers from IHS Markit and the ONS show. This is very bad.
“While consumers continued to spend last year, their delayed reaction to the hit to their spending power risks a more severe slowdown in 2017,” Goodwin added in his research earlier in the week. “And, with the squeeze on real incomes likely to remain fierce over the next few quarters, we expect to see much weaker growth in consumer spending through 2017.”
Given that consumers have been the key drivers of the UK’s economic strength in recent years, any consumer slowdown is a troubling prospect. To make matters even worse, households are simply not saving and have been fuelling their spending with borrowing.
As my colleague Thomas Colson wrote last week: “British households were borrowing freely last year, thanks to low-interest rates and the wide availability of cheap credit, but spending based on credit is unsustainable.”
Goodwin writes: “The starting point of an historically low savings ratio, and with many consumers having already used credit to smooth their consumption last year, raises the risk of a more aggressive retrenchment.”
Add to this picture the fact that inflation is set to get even worse as the slump in the pound hits imports and the reality of stagnant wage growth and 2017 could get very, very tough.