UK Facing Tougher Times

Britain experienced its worst year for consumer spending in five years in 2017, after expenditure dropped in the run-up to Christmas as declining real wages and economic uncertainty continued to put a strain on household finances.

Figures being published by Visa and IHS Market Monday show that retail spending fell by 1% in December on an annual basis, with total expenditure falling for seven of the past eight months. Compared with November, spending fell by 2.6%, contributing to a 0.3% drop for the whole of 2017, the first annual decline since 2012, news outlets reported.

Annabel Fiddes, principal economist at IHS Market, said that even though inflationary pressures caused by the fall in the value of the pound since the Brexit vote were expected to subside in the coming months, it seemed “unlikely that expenditure will bounce back to the levels of growth seen in 2016 any time soon”.

The sustained drop in retail spending comes as household purchasing power is being eroded by rising living costs and subdued growth in pay packets. Consumer confidence remains relatively muted amid uncertainties over the strength of the UK economy and Brexit negotiations.

A rise in online shopping has helped to soften the blow for retailers, but even here growth slowed. While online spending rose by 2% last month, this compared with a 2.4% expansion rate in November.

Withdrawal of Credit Insurance

The data coincides with a mixed bag of news and Christmas trading updates from retailers. At the weekend New Look, the struggling fashion chain, suffered a further blow with news of the withdrawal of credit insurance to some of its suppliers, a development first reported by The Sunday Times. The insurance protects suppliers against the risk of a customer going bust between the point of accepting an order and payment being made.

According to people familiar with the matter, Euler Hermes, a leading credit insurer, stopped offering cover on new shipments of goods to New Look as of last month. QBE, another insurer, has reduced its level of cover in places but has not stopped providing it entirely.

Separately, Warren Evans, a maker of luxury beds that has 14 showrooms in London and southeast England, is understood to be bracing itself for a full year of losses in 2017. It has hired Duff & Phelps, the restructuring specialist, to seek out a buyer, according to The Sunday Times.

Investors are preparing themselves for more bad news at the start of a busy reporting week for big retailers, as Marks & Spencer, Wm Morrison, J Sainsbury and Tesco are all due to reveal Christmas trading figures.

Economy Loses Steam

The economy will face similar demons this year to those of 2017. Inflation is now at 3.1%, the highest level in more than five-and-a-half years, and wage growth is failing to keep pace. The resulting slowdown is likely to take its toll this year: economists see growth slowing to an annual 1.4%, according to a Bloomberg survey.

UK house prices fell for the first time in six months in December amid economic uncertainty and a squeeze on incomes.

Prices slid 0.6% on the month, the first decline since June, mortgage lender Halifax said on Monday. Annual price gains slipped to 2.7% in the last three months of the year, from 3.9% previously.

In 2017, “house price growth slowed, whilst building activity, completed sales and mortgage approvals for house purchase all remained flat,” said Russell Galley, managing director at Halifax Community Bank. “This has been driven by a squeeze on real-wage growth and continuing uncertainty over the economy.”

The UK housing market cooled last year as economic growth lost momentum, with London a particular weak spot. A report from Nationwide Building Society last week forecast prices will barely gain this year, while Halifax has a similar outlook, predicting a dearth of supply will prompt annual growth in the range of 0% to 3%.

Industries Struggling

Samuel Tombs, UK economist at Pantheon Macroeconomics, says cuts in planned investment since the Brexit referendum now mean UK industry is struggling to meet the higher demand. Firms have been running down their stocks of finished goods to meet orders but work backlogs are now increasing.

Manufacturing’s share of gross domestic product has been in steady decline for decades and it now accounts for just 10% of the economy. Even after recent growth, UK factories are still producing less than they were before the deep recession of a decade ago.