Consumer spending has taken a massive hit within the United Kingdom. Recent figures have shown that this current trend represents the most profound decline since the economic doldrums of the 1970s. Such a position has concerned economists for some time, as they were worried that it would have been one of the outcomes of the Brexit. However, is there more than meets the eye other than cold, hard facts? What are a handful of other potential causes and can the Bank of England take any actions in order to counteract this disturbing trend? Let us take a closer look.
The Basic Observations
The main takeaway point from what was found recently highlights that the economy of the United Kingdom experienced a sharp reversal in the first months of 2017. This is particularly the case in regards to consumer spending although some data suggests that the services sector may have seen a slight improvement. Furthermore, the Office for National Statistics (ONS) found that disposable household income suffered its worst decline in more than 40 years.
Other growth statistics were just as bleak. The ONS observed that investment in businesses increased by a mere 0.6 per cent during the first quarter of 2017 and that the services sector saw only 0.2 per cent growth. Now that we have highlighted some of the most prominent figures, it is important to take a look at why they are currently hounding economists.
The Average Consumer
The first point to take into account is the very real psychological effect that consumer confidence can have upon the economy. Many Britons are still wary about the impact that the Brexit will have upon their wages and future lifestyles. This actually makes a great deal of sense, for negotiations still seem to me mired in turmoil and suffering from political infighting.
As a result, many consumers are curtailing their spending habits until a clearer picture emerges. The main issue here is that it is not altogether certain when more stability will be gained. So, the United Kingdom could be in for a rough economic ride from a short-term point of view.
Inflation is the other main factor. The pound has lost a significant amount of its value since the ratification of the Brexit. This is obviously detrimental when referring to the price of goods and services. It therefore makes perfect sense that consumers are tightening their proverbial “belts” until this value rises once again. However, there is a fair amount of uncertainty about how the pound will be affected by the Brexit and some fund managers are even predicting that it could reach parity with the euro in the not-so-distant future. While this might be able to increase foreign investments into the United Kingdom, it is not likely to help extricate the economy from its current doldrums.
What Steps can be Taken?
The next logical question to ask is whether or not the government of the United Kingdom can adopt any policies to ease this situation. One of the first steps may be for the Bank of England to enact a much-anticipated interest rate hike to stem the effects of inflation. This would be the first such move in a decade. It is interesting to note that such an action was not predicted to take place until sometime in 2019. Many feel that this hike will be discussed in greater detail when BoE executives meet in August.
Watch and Wait?
However, it is just as likely that policymakers will adopt a watch-and-wait approach as the details of the Brexit are ironed out in the weeks and months to follow. The only issue with this approach is that such an economic stance is not likely to ease the burden on the average consumer. We should therefore fully expect that this domestic spending slowdown will continue.
Overall, consumer spending will inevitably pick up pace as the effects of the Brexit become more clear to the UK population. The real question revolves around what damage will have already been done between now and then. It appears as if this bumpy economic road is not going away anytime soon.