UK turnaround warning – decline in consumer financial wellbeing

103760081_71df0c3a51As we have mentioned in previous blogs, the UK economy is in large part driven by consumer spending. Hence, you and I make up around 60% of our £1.4 trillion economy.

And, as we are all aware, things have been going a bit better recently in terms of the UK turnaround and recovery, with us consumers apparently feeling more confident about the state of the economy, and spending a bit more of our hard-earned income.  However, many commentators – including myself – have been very concerned about this growth in consumer spending, as they feel it is being driven by the increase in house prices, in turn driven by government-backed schemes such as “Funding for Lending” and “Help to Buy“, potentially fuelling another asset bubble.

Paradoxically, the return to growth of the economy in the last three quarters has happened despite wage increases remaining low at a time when inflation has been stubbornly high.

Rebalancing the economy

There has been a widespread call for a rebalancing of the economy, suggesting that growth in business investment, and in particular value-added manufacturing, will give us a more sustainable recovery, i.e. less emphasis on consumer spend, to avoid the potential of asset bubbles and unmanageable inflation.

Less optimism amongst consumers after a year of growth

New statistics just published in the Markit Household Finance Index (HFI) show that, despite the growth in GDP for the last two quarters – and the fact that the UK is growing at the faster rate than the US, Germany and Japan according to the OECD – householders are feeling less optimistic about their finances than at any time since April!

The report, which measures perceptions of financial wellbeing, showed a significant drop from October to November, from a reading of 41 to 38.8.

This very much suggests that the feel good factor we, as consumers, have been feeling thanks to the upward movements in the economy have started to slide. The Markit report blames rises in energy prices, and the continued lack of improvement in pay.

In addition, the survey showed that 42% of households expected their finances to worsen over the next 12 months, with just 24% thinking they will improve.

Winners and losers in the new economy

It is also worth noting the content of another recent report published by Mckinsey Global Institute, which provides data and opinion on how the world’s major central banks adopted unprecedented monetary policy to shield economies from the effects of the 2007-8 financial crisis.

The report makes the point that there have been winners and losers resulting from the ultra-low interest rates and quantitative easing that have formed a major part of these policies. The major winner has undoubtedly been the UK government (and therefore you could say all of us, albeit this is not a tangible gain), enjoying very low rates of interest on the money it borrows from other countries. These low interest rates also led to a boost in corporate profits in the UK by some 5%.

On the other hand, the older, more established household in the UK has been a net loser.  These householders with low levels of debt and higher savings have paid the price; thus, the people who have done the right thing and saved some of their hard-earned cash have paid for the more profligate among us

Why this might be happening?

It may be that the increase in UK growth in 2013, and confidence, is starting to peter out.  Maybe the savers have just had enough of bailing out the banks, the risk-takers, and the “spend-more-than-you-earn” brigade, and have worked out that nothing actually changed earlier in the year, we just got a bit fed up with being downbeat.  Oh, and we fell for a bit of cheap money coming into the housing market.

I believe the price for the global financial crisis has still not yet been paid…


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Image by: LeoLondon