Sentiment weakens with ‘caution’ the watchword for 2017
Consumer spending rose 4% in December, dropping below the Q4 average of 4.8%, suggesting shoppers have started to rein in spending amid concerns over the wider economic picture moving into 2017.
Economic uncertainty hit spend in December
Data from Barclaycard, which processes nearly half of the nation’s credit and debit card transactions, shows that December’s slower growth – while the same rate seen in December 2015 – was below the average of 4.8% for Q4 2016, the highest growth in four years. This was boosted by record highs in October (5.5%) and November (5.1%). Not all growth was due to consumers splashing out, however, with rising prices responsible for some of the robust figure.
December’s softer figure coincided with a drop in the proportion of consumers expressing confidence in the UK economy, which fell 12 percentage points from a record high of 48% at the end of Q3 to just 36% at the end of Q4 – a return to levels seen before the
EU referendum in June.
High-street woes but online grows
The end of the year proved a hit for ecommerce retailers, with online spending up 15.1% in December. The high street suffered, however, with in-store spend growth flatlining at 0.3%, leading some retailers to issue profit warnings after the festive period.
Spend on clothing was the hardest hit, contracting 0.3% year-on-year and falling into negative territory for only the sixth month since records began. Meanwhile, spending in department stores posted a fifth consecutive month of decline, down 3.5% versus the same month in 2015.
A shifting of priorities
The ‘experience economy’, a driving force of spending growth throughout 2016, weakened as the gap between spend on essentials and non-essentials continued to narrow. Although entertainment spend – which includes pubs, restaurants, cinemas and concerts – rose 7.6%, this was its slowest rate of growth since November 2015. Despite this, leisure time remained a key priority for consumers, with double-digit growth across pubs (10.3%) and restaurants (11.2%).
Spend on essentials grew in December
In contrast, spending on essential items was strong at 3.4% growth in December. This was partially driven by petrol rising 10% year-on-year – its second double-digit increase in 28 months and the result of pump prices reaching an 18-month high, contributing to Q4 petrol growth posting a 9.4% rise overall. This year, spending on petrol – and in turn, essential spend – may put a squeeze on household purchasing power, especially if the depreciation of the pound continues.
"Rising inflation is likely to be one of the main factors that dampens household spending this year, as it eats into households’ real income growth. Indeed, with average annual wage growth hovering around 2.5%, another period of falling real wages is not out of the question. On the face of it, this suggests that consumers will prioritise essential spending."
Paul Hollingsworth, UK Economist, Capital Economics
‘Caution’ the watchword for 2017
The shift in spend from discretionary items to essentials reflects a growing sense of caution, as the arrival of 2017 brings a new wave of economic uncertainty following the Brexit vote. 39% of consumers expect the UK economy to decline over the course of 2017, and 42% believe their personal finances will suffer as a direct result of Article 50 being invoked.
"Manufacturers have indicated that they will look to absorb extra import costs as far as they can by reducing product margins and overheads, reformulating products in some way, investing in automation or increasing export activity – but most will reach a point where something has to give."
Dominic Goudie, Policy Manager (Exports, Trade and Supply Chain) Food and Drink Federation
"Looking ahead, all eyes will be on whether this year will see households begin to feel squeezed by rising prices, leading to a sustained fall in consumer spending on discretionary items in favour of their day-to-day essentials."
Paul Lockstone, Managing Director, Barclaycard
"Consumer sentiment and spending habits were surprisingly resilient in the wake of the Brexit vote, but in 2017 the consumer environment will become more challenging."
Danielle Haralambous, Senior UK Economis, The Economist Intelligence Unit