Elbowing through the crowds at London’s Westfield shopping centre on a showery Saturday in August, you would not think the UK was at risk of an impending recession.
Cafés are overflowing at the emporium in Shepherds Bush. Families are queueing up to watch Toy Story 4. People are swarming around a display of Lexus hybrid electric cars, checking whether they qualify as clean enough to avoid London’s new emissions charge.
The Brexit vote has had a paralysing effect on businesses, but consumers have played a key role in propping up the economy through their willingness to spend. There is a notable — and growing — disconnect between people’s gloom over the outlook for the economy, and their relatively upbeat view of their personal finances.
“People are just getting on with things,” said Yael Selfin, economist at KPMG. “Interest rates aren’t going up. Credit is cheap and plentiful. The jobs market is still OK and those who voted for Brexit are pleased with where we are going.”
Official data reflect this dichotomy. Gross domestic product shrank for the first time in almost seven years in the second quarter of 2019, with manufacturing activity falling, the services sector bordering on stagnation and business investment slumping.
But household spending grew by a reasonably healthy 0.5 per cent in the three months to June, after a similar pace of expansion in the first quarter.
The latest official retail data tells a similar story: sales volumes were 0.5 per cent higher in the three months to July. Some parts of the sector looked much stronger than others — with Amazon’s annual flash sale for members fuelling growth in online-only retail — but even department stores, which have struggled for some time, recorded month-on-month increases in sales volumes in July.
Consumers are hardly throwing caution to the wind, but even this modest growth in household spending may be enough to keep the economy out of recession for the moment.
“We still think consumers can be relied on to steady the ship,” said Samuel Tombs, economist at Pantheon Macroeconomics, a consultancy.
Acute political uncertainty is, however, making people wary of making big financial commitments.
With house prices down year on year across south-east England, many are waiting to move until the property market steadies, with knock-on effects for sales of household goods.
And despite strong growth in sales of electric vehicles — a tiny part of the market — spending on cars has fallen sharply. This is partly due to a backlash against diesel vehicles, because of concern about their role in air pollution.
Yet it makes sense for people to be spending more freely in other areas.
Household finances are in better shape than they have been for years. Employment is at record highs and wages are growing at the strongest rate since the 2008 recession, with those on low incomes helped by recent increases in the minimum wage.
Mortgage rates are near record lows and growth in consumer credit has been slowing since 2016. “UK households . . . are acting prudently, they’re not borrowing a lot, they’re spending out of their real income, said Mark Carney, the Bank of England governor, this month.
But this does not mean all households are ready to withstand an economic shock — notably a no-deal Brexit.
Gabriella Dickens, economist at Capital Economics, a consultancy, said there was “no reason why household spending shouldn’t remain one of the strongest parts of the economy” so long as the UK reached an agreement with the EU on the terms of its departure.
But there is an increased risk of the UK crashing out of the EU, given prime minister Boris Johnson is insisting Britain leaves the bloc on October 31, with or without a deal.
Gertjan Vlieghe, an external member of the BoE’s Monetary Policy Committee, said last month the UK’s low savings rate made him “concerned about the vulnerability of households to a downside surprise in income or employment”.
A no-deal Brexit could be bad news for jobs, wages or both — and a decade of pay stagnation has left many people on low incomes ill-prepared to cope.
The Resolution Foundation, a think-tank, noted many low and middle income households now have no financial leeway: almost 60 per cent have no savings at all and a significant minority have already made big cuts to spending.
The foundation argued that even a small rise in unemployment would hit younger workers and those with few qualifications — many of whom now have contracts that offer little job security.
The welfare system has also become less generous than it was in the past, and its design would do more to mitigate a drop in earnings than a rise in unemployment. The Institute for Fiscal Studies, another think-tank, has warned that people who lost their jobs now would find benefits replaced a smaller share of earnings than in the recession of the 1980s.
Robert Chote, head of the Office for Budget Responsibility, the fiscal watchdog, told MPs last month the new universal credit benefit might not provide the automatic boost to household incomes that the welfare system has traditionally delivered in a downturn.
For now, however, consumers do not seem too worried.
Ms Selfin said in parts of the UK where support for Brexit is strong, many people “are euphoric about leaving and want to get on with it”, adding: “the others are fed up — but they have detached politics from their financial situation”.
This is the second part in a series about the state of the economy in the run-up to Brexit.
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