British consumers have cut back on spending more than almost any other industrialised country as the cost of living crisis takes hold with the latest data and economists’ forecasts pointing to the trend continuing in to next year.
Household spending in the three months to September was 3.2 per cent below pre-pandemic levels — by far the biggest fall among the G7 economies and the third worst performance across the 43 countries that have published detailed national accounts data for the third quarter, according to an FT analysis.
In contrast, household expenditure was up 7 per cent in the US, 2.7 per cent in Canada, 1.6 per cent in Japan and 0.3 per cent in France compared with the final three months of 2019, the last full quarter before coronavirus hit.
Economists attributed the greater tightening of purse strings in Britain to a weaker labour market, higher energy bills, the worsening economic outlook and the impact of Brexit.
Paul Dales, chief UK economist at Capital Economics, said Britain’s underperformance compared to other developed economies was both “remarkable and worrying” and blamed it in part on the growing number of inactive workers.
UK employment was still 0.5 per cent below pre-pandemic levels in the third quarter, compared to a 2 per cent average rise across OECD nations, including increases of 4.6 per cent in France and 3 per cent in Canada.
In addition to a “muted recovery in employment,” Gabriella Dickens, senior UK economist at Pantheon Macroeconomics blamed the depressed spending levels in the UK on lower consumer confidence in the UK and prices that have “risen to a greater extent than in the US and the eurozone.”
She said this was in part owing to British households facing higher electricity and gas bills in contrast to those in the eurozone, which have benefited from greater state intervention, and in the US, where energy costs are lower.
UK energy consumer price inflation reached 59 per cent in October, the highest since records began in 1989, compared to 34.9 per cent in the eurozone and 17.6 per cent in the US.
The UK scored 49 out of 100 in the global confidence tracker by Morning Consult published on Thursday. In contrast, the US registered 81, Canada 71 and the eurozone’s largest economies ranged between 54 and 65.
The impact of higher energy costs, higher interest rates and weakening consumer confidence “have cut short the recovery in household spending this year,” said Yael Selfin, chief UK economist at KPMG.
The Bank of England and the Office for Budget Responsibility, the UK fiscal watchdog, have forecast a prolonged economic downturn in the UK. Last month, the OECD warned that the British economy was set to be the worst performer in the G20 bar Russia over the next two years.
Susannah Streeter, senior investment analyst at asset manager Hargreaves Lansdown, said the UK was lagging behind other countries “as consumers batten down the hatches and prepare for a long recession amid worries energy bills will escalate again next year.”
Pantheon’s Dickens said the relative weakness in household spending was “the main contributor to the UK’s poor [overall] performance”. UK third-quarter gross domestic product was 0.4 per cent below the final quarter of 2019, leaving it as the only G7 country not to have regained all the ground lost during the pandemic.
The UK’s headline measure was boosted by an uplift in public spending, which was 4.7 per cent above pre-pandemic levels and higher than many of its peers, such as Italy, France and the US.
Brexit was also having an effect as it had “hampered business investment and exports,” said Dale. The UK’s goods and services exports relative to pre-pandemic levels were below any other G7 country, according to the latest data. The UK was also the worst performer in business investment, which was down 8.4 per cent from the final quarter of 2019, in contrast to a 4 per cent increase in the US.
The data has come “thick and fast on the deep repercussions that the vote to leave the EU has been having on the economy and, as a knock-on effect, on households’ willingness to spend,” said Hargreaves Lansdown’s Streeter.
More recent survey data suggest the economic outlook is deteriorating as consumers have cut back even more on spending in the final months of 2022 as the costs of living crisis intensifies.
The closely watched PMI business sentiment indicators suggest the economy was contracting in October and November, while the ONS bimonthly survey of households found a rising proportion of people cutting discretionary and essential spending over the same period.
Selfin of KPMG cautioned that a softening in the labour market “could lead to higher levels of precautionary savings held by some households and contribute to further weakness in consumption.”
Streeter warned that depressed levels of consumer spending in the UK were “likely to continue through the rest of Q4 and into 2023, particularly as a higher energy price cap will be introduced in the spring, piling fresh pressure on households.”
The prospect of fiscal and monetary policy tightening further was expected to leave the UK economy falling “further behind its peers in 2023,” Dickens said.