Archive for the ‘Consumer Expenditure’ Category
Wednesday, July 28th, 2010
The National Institute of Economic and Social Research (NIESR) has just launched its quarterly review of the UK economy. It actually believes that Britain will see a 1.3% increase in GDP this year, which is above the forecast of 1.2% made by the Office for Budget Responsibility.
However, that is where the good news ends. NIESR forecasts that GDP will only grow by 1.7% in 2011-12 and 2.2% in 2012-13. This is substantially lower than forecasts made by the OBR of 2.3% and 2.8% respectively. NIESR believes that the governments severe spending cuts will lower economic growth in every year up to 2015, particularly due to cuts in consumer spending.
Although the last quarter showed surprising growth of 1.1% the NIESR said that the future could still be “bumpy”, and that there may be no growth at all in some quarters. It actually expects growth of only 0.1% in the third quarter of this year and 0.3% in the fourth.
As far as the world economy is concerned the thinktank predicts growth of 5% compared with a downturn of 0.6% last year. However, it expects the fiscal austerity plans in many nations will reduce growth the following year to 4.4%. The global recovery is expected to be led by sharp growth in Asia, especially in China, India and Taiwan.
Tags: austerity package, Consumer Expenditure, economic growth, GDP
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Monday, February 22nd, 2010
Retail sales volume fell by 1.8% between December 2009 and January 2010. This represents the largest decrease in a single month since June 2008 when it was 2.5%. Stores which predominantly sell food showed a fall of 2.4%, whilst predominantly non-food stores showed zero growth. Within this latter category, there was an increase in textile, clothing and footwear stores of 4.7%. By contrast, household goods stores saw a fall of 13.4%.
When the January figures are compared with the same month last year, retail sales were actually 0.9% higher. The recent trend can be seen in the graphic below.
 Source: ONS Why did sales fall in January? There were some extenuating circumstances. Firstly, there were fewer visits to the supermarket as a result of the snow and icy conditions which covered much of the country, and consumers probably relied on running down what they already had in the pantry and the freezer. Secondly, VAT was put back up to 17.5% in January which may have caused some cut back in purchases, or more probably larger purchases had already been made at the back end of last year.
Consumer spending accounts for over two-thirds of GDP in the UK so this fall is not going to help economic growth. Given the increasing deficit on our trade account as well, it is difficult to see where growth is going to come from. The prospects of moving back into recession are probably growing.
Richard Hyman, strategic retail adviser to Deloitte was quoted as saying that the signals for consumer spending were less encouraging for this year. He said: “Income taxes and national insurance will rise and following the general election, the next government will have the task of tackling public debt. This is likely to include a mix of spending cuts and increased taxes and it is difficult to imagine the consumer not being hit in some way or other.”
Tags: Consumer Expenditure, economic growth, recession, retail sales
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Tuesday, January 19th, 2010
CPI annual inflation which is targeted by the government, rose to 2.9% in December 2009 from 1.9% in November. This increase of 1.0% was the largest ever increase in the annual rate between two months.
Why was the increase so large, especially considering that the consensus amongst City economists was for a rise to 2.6%? The basic reason is not so much about what happened this year but what happened last year. We have to remember that we are looking at an increase based on the figures for the previous year, and what happened to prices in December 2008 was exceptional.
There were three main contributing reasons. Firstly, the standard rate of VAT was cut from 17.5% to 15.0% in December 2008. Secondly, there were sharp falls in the price of oil and thirdly, there were, unusually, pre-Christmas sales that month as a result of the economic downturn. Taken together, these events led to the CPI falling by 0.4% between November and December 2008. This means that the increase of 0.6% in the CPI between November and December 2009, together with the previous year’s fall, generated the 1.0% upturn in the index. In fact, a monthly increase of 0.6% in the CPI between two months is not in itself so untypical.
The recent trend can be seen in the graphic below.
 Source: ONS
The largest upward pressure on the CPI in December 2009 was from the transport sector, with fuels and lubricants rising in price by 0.2% on the month, compared with a fall of 6.2% a year ago. There was also upward pressure from clothing and footwear where prices fell between November and December 2009 but fell less than they between the same two months in 2008. However, overall, there was upward pressure on prices from 10 of the 12 divisions which the ONS measures and there were no significant downward pressures.
As far as RPI annual inflation is concerned this rose by 2.1% from 0.3% in November to 2.4% in December 2009. The last time there was a monthly increase of this magnitude was between June and July 1979. The RPI was affected by the same pressures as the CPI as shown above. But, in addition, it was affected by the housing sector. Here, mortgage interest rates which fell significantly between these months in 2008 actually rose in the same period of 2009.
RPIX inflation, which is the RPI excluding mortgage interest payments rose from 2.7% in November to 3.8% in December 2009. At the same time, core inflation, which excludes food, energy, tobacco and alcohol rose by 2.8% on an annualised basis, which again is the fastest growth rate since records began in January 1997.
What of the future? The Bank of England has forecast that the CPI will show a rise of about 2.6% over the first quarter of 2010 and once the change back up in the VAT rate has worked its way through, many economists believe the CPI will fall back. There is also a difference of opinion as to the length of the time lag for the previous falls in the value of sterling to work their way through into higher domestic prices, and if these have been underestimated, we may see more pressure on the CPI in the months ahead.
Finally, disposable incomes increased by 5.2% in the year to the third quarter of 2009, particularly due to the effect of lower mortgage payments. If this goes into spending rather than the running down of existing debt as has been happening, then again we could see a feed through into higher prices.
Tags: core inflation, CPI, disposable income, Inflation, RPI, RPIX, sterling
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Friday, January 15th, 2010
UK households spent less on average per week on shoes and clothing in 2008 than at any time since 2001-02, according to ‘Family Spending’, the annual report on household expenditure from the Office for National Statistics.
Spending on clothing and footwear fell to an average of £21.60 per week from a high of £23.90 in 2004-05. Why did we spend less? Primarily because of the credit crunch which led to a lot of high street discounting towards the end of 2008. So why do we need bigger wardrobes? Primarily because the evidence shows that while we are spending less on clothes, we are actually buying more of them. This is what some have called the “Primark Effect”. Evidence shows that consumers are now spending £1 in every £4 on budget fashions.
 We are spending less on clothes overall but buying more cheaper clothes.
However, in total, average UK household weekly expenditure was £471.00 in 2008, compared to £459.20 in 2007. In fact, most categories of spending went up in 2008, with food and non-alcoholic drinks rising to £50.70 per week compared to £48.10 in 2007. There was also a rise in spending on electricity, gas and other fuels to £18.90 from £17.20.
The single largest category of expenditure is transport, with the average weekly household spend rising from £61.70 in 2007 to £63.40 in 2008.
The figures also reveal an interesting difference between rural and urban areas. In 2008, the average spend in rural areas was £505.40 compared to £446.70 in towns and cities. This difference was mainly due to spending on transport, recreation and culture.
The survey also found strong regional differences. Northern Ireland had the largest average weekly household expenditure at £479.70 with Wales showing the lowest spend at £406.70. Also, in England the north-south divide was very evident with above average spending stretching from the South-West, to London, the South-East and the East. The lowest level of expenditure was in the North East, although the statisticians at the ONS have probably never visited Newcastle’s Bigg Market on a weekend evening – or any evening come to that.
Tags: Consumer Expenditure, household spending
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Thursday, January 14th, 2010
Consumer confidence fell in the last quarter of 2009 with nearly a third of consumers expecting the economy to get worse this year, according to research published today by the Association of British Insurers.
Of 2,500 adults questioned, 31% expected the economy to worsen in 2010 with only 39% being optimistic – a sharp fall from the 52% recorded in the previous quarter.
There was a rise of 4% to 31% in the numbers who said they were concerned about job security. The result of this has been a concerted move by many consumers to pay off existing credit card debts and other loans in an attempt to get back on an even financial keel, in preparation for what they see as a worsening of the economy. In fact 42% of those questioned have started paying back non-mortgage debts compared to only 34% a year ago.
 Consumer pessimism is causing more to pay off their debts.
Also, a fall in the plans of consumers to save has been noted. Of those saving regularly, only 17% expect to be saving more this year which is a fall from the 24% recorded in the last quarter.
According to Dr Rebecca Driver, the ABI’s Director of Research and Chief Economist: “Despite continued fiscal and monetary policy intervention, consumer perceptions of the economic prospects and their own job security in 2010 have deteriorated.
“Seven-in-ten people feel that they would cope badly financially if they lost their job, with four-in-ten admitting that they had not made adequate financial provisions to enable them to cope with a large, unexpected expense. This is not because people are spendthrift – the majority would prefer to go without than get into debt…”
At the moment it seems as though consumers are choosing to run down savings to pay off debt rather than looking to increase their consumption spending.
Tags: consumer spending, debt repayment, saving, unemployment
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Tuesday, December 1st, 2009
The Bank of England has just reported that unsecured loans, which include bank loans but exclude mortgages, fell by £713m in October, which is the biggest month-on-month fall since records began in 1993.
The total amount of unsecured consumer borrowing now stands at £228bn. When we look at the change in consumer credit for October the figures show that credit card borrowing actually rose by £134m to give an overall net fall in consumer credit of £579m.
Consumers have now repaid more unsecured debt than they have taken out in additional borrowings for the fourth month in a row.
 Consumers are using spare cash to repay debt.
Why is this happening? Well, on the one hand the availability of unsecured credit from banks is limited and could well be acting as a brake on borrowing. But also, consumers are currently reducing their levels of saving in the current climate of low interest rates and using any surplus cash to pay off their debt. This makes sense as the opportunity cost of putting money into savings accounts has dropped.
This change in consumer financing may well have implications for the recovery as it could limit consumer spending and thus reduce economic growth.
Tags: consumer borrowing, consumer spending, economic growth, Interest rates, savings
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Thursday, October 8th, 2009
The Federal Reserve Bank of Dallas has just published an International Economic Update by Patrick Roy. This examines the dramatic turnaround in growth in the second quarter in a number of emerging economies. Although the substantial growth in some Asian countries could be put down to strong trade ties with China and India, Roy points out that most of these countries saw growth in private and government spending that outpaced growth in net exports.
Roy outlines the differences in growth amongst advanced economies saying: “A look at the contributions to GDP helps explain the disparity among advanced economies. The euro area and Japan both saw increases in domestic consumption, albeit a very small increase in the euro area. Net exports in both economies, which had been hard hit over the preceding four quarters, also showed a dramatic turnaround in second quarter 2009. The increases in net exports are due in large part to the strength of the emerging Asian economies relative to their own domestic markets. Investment in fixed capital remains a drag on all the advanced economies, while the drawdown in inventories in the euro area and Japan is a positive sign for those countries.”
This sectoral analysis of GDP growth can be seen in the chart below.
 Source: P.Roy, Federal Reserve Bank of Dallas The article also examines the reasons behind stagnant credit growth in Europe, decline in employment and inflation uncertainty, concluding that: “Second-quarter GDP growth was better than expected in most cases. Many countries grew, while the remainder saw their pace of decline slow. However, it may be too early to say if we are in the midst of a global recovery. Investment in the advanced economies remains weak, employment is still declining and credit is not growing in Europe. The International Monetary Fund (IMF) expects that any recovery will be slow, given experiences from past financial crises. While productivity takes awhile to rebound, the IMF reports that there usually is not a permanent loss to output growth in the medium term. Overall, the international economic data give reason for cautious optimism.”
The article contains 7 very useful charts and tables and can be viewed here.
Tags: advanced economies, commodity prices, credit, emerging economies, Employment, gdp growth, Inflation, sectoral growth
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Wednesday, September 2nd, 2009
After racking up total debts of just under £1.5 trillion, UK consumers are cutting back and borrowing less. Figures from the Bank of England show that consumers repaid loans to the tune of £600m in July, which was the first net repayment since records began in 1993.
In fact the 12-month growth rate of total net lending to individuals fell by 0.3 percentage points to 0.9% in July. Within this, net lending secured on dwellings showed a net repayment of £0.4bn. So, although new mortgage approvals rose to just over 50,000 in the month the total value of mortgage lending actually declined, as repayments exceeded new financing.
There was also a fall in consumer credit in July of £0.2bn, with the 12-month growth rate falling from 2.0% in the previous month to 1.4%.
 Consumers are staying in and saving the pennies. This return to thrift could delay the economy’s escape from recession. Although saving is considered a virtue, it is spending which the government is looking for in order to boost aggregate demand. This is why the Bank of England has invested so heavily in quantitative easing, in the hope that there would be more liquidity in the economy to facilitate greater lending. We have seen recently that the banks have been reluctant to lend but at the same time consumers have been reluctant to borrow.
It does seem that the Bank’s efforts are boosting liquidity as the broad measure of the money supply, M4, which includes notes, coins and deposits at banks, grew by 0.6% in July to give a 12-month growth rate of 5.3%. However, it is difficult to criticise consumers, who following the example of the banks, are trying to get their personal balance sheets in order. Whilst there are still worries about the recession and the possibility of increasing unemployment, people are being cautious. Those who hold mortgages are taking the windfalls from lower mortgage rates and using them to pay down debt, rather than going on a spending spree. The impact of this on the economy overall may not stall the recovery altogether but may slow it down.
Tags: borrowing, consumer credit, lending to households, M4, mortgages, quantitative easing, recession
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Thursday, August 13th, 2009
“We will still find ourselves in a difficult position for a long time to come”, said Mervyn King, governor of the Bank of England, in the Bank’s latest quarterly inflation report. He noted that the economy is still in a deep recession and our financial system remains “fragile”.
In fact the governor reported bad news and good news as well as putting out a warning about the future. The bad news was that the recession had been more severe than the Bank had anticipated, even as recently as its last report in May. The good news is that: “….as the impact of de-stocking has turned round and the effects of a lower exchange rate and the policy stimulus have begun to come through, the pace of contraction has moderated.
In fact, the Bank is now making a central forecast of UK growth at about 1.8% next year, which is up from the previous 1.1% forecast in May. This is in spite of the fact that the forecast for growth this year has worsened from minus 3.9% predicted in May to a revised 4.4% forecast now. So although the recession was deeper than originally thought, it will bounce back more quickly than most commentators have been predicting.
 The Bank is predicting jam tomorrow, or at least next year - if we are lucky. As far as inflation is concerned the Bank expects that the rate will be below its 2% target up until 2012, even given the £175bn programme of quantitative easing which has been injecting increasing liquidity into the economy. The UK has in fact increased liquidity by a higher proportion of GDP than any other country in the current crisis, as confirmed this week by research published by the International Monetary Fund.
It is now expected that interest rates are likely to remain at 0.5% until well into 2011. This caused an immediate fall in the price of sterling as traders were forced to revise their forecasts.
What are the warnings for the future? There are still concerns about the level of unemployment. If this continues to grow, as a lagging indicator of the recession, then we can expect a cutback in consumer spending and a growth in savings, which will help to put a brake on the extent of any recovery.
There are also concerns about the impact of quantitative easing so far. The governor said that: “The asset purchases have had some effect. It may not have got money growth back to where we would like it to be in the medium term, but it may have prevented a more serious fall.” He went on to say that he hoped money supply growth would pick up over the next two to three quarters.
He also noted that firms were currently constricted from raising prices, but that a further fall in the value of sterling will put upward pressure on import prices and if this becomes too great, may cause the Bank to raise interest rates to prevent inflation.
Finally, the Bank is concerned with the degree to which the banking system continues to be undercapitalised. The governor said that: “The amount of capital raised so far has been small relative to the size of banks’ balance sheets” and pointed out that if this continues it may put a cap on bank lending growth and hinder the recovery.
Tags: Bank lending, economic growth, GDP, Inflation, Money Supply, quantitative easing, sterling
Posted in Bank of England, Consumer Expenditure, Exchange Rates, Inflation, Lending, Money Supply, economic growth, recession, sterling, unemployment | No Comments »
Tuesday, July 7th, 2009
It’s amazing when the good news is that new car registrations only fell by 15.7% in June. But this decline was the lowest monthly figure since July 2008, even though the total year-to-date statistic shows a drop in the market of 25.9%.
Private car sales actually rose in June by 3.9% and have proved to be very resilient over the past couple of months. These latest figures include the first full month of the introduction of the government’s scrappage scheme which offers a £2000 subsidy to be put against a new car for a buyer who allows his vehicle which is over 10 years old to be scrapped.
Since the car scrappage scheme began on 18 May almost 30,000 vehicles have been registered under the scheme which accounted for nearly 10% of new car registrations in June.
The possible problems with the scheme are that the companies that benefit may not be producing cars or parts in the UK and so much of the money paid for new cars will leave the country. For example, almost 25% of the scrappage scheme has gone to the Korean manufacturers of Hyundai and Kia. Much of their production comes from factories in eastern Europe.
Also, there is the problem that if such large amounts are being spent on cars there is less money available to spend on other expensive consumer goods. It seems that the evidence coming from France and Germany which started their car scrappage schemes before us, is lending weight to this hypothesis.
Finally, although there has been an improvement in the private market sales of fleet and business cars continue to decline. In June fleet sales were down 29.3% on the year-to-date compared with 2008, and business car sales were down 35.9%.
Tags: car sales, Consumer Expenditure
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