Section 1: Executive Summary
UK economic growth, falling inflation and wage growth have resulted in the recovery of household finances above 2021 levels. However, structural services inflation and higher interest rates present risks to sustained further consumer spending growth.
Section 2: The UK Economy Continues to Recover in 2024, but Services Inflation Remains a Challenge
UK GDP is rebounding modestly
Following a technical recession in Q4’23, the UK economy demonstrated better-than-expected growth in Q1’24 driven by greater services output and improvements in production activities.
UK inflation continues to fall in most areas
UK inflation continued to fall in the first half of 2024, driven by reduced prices for consumer goods, food and beverages, which benefit from easing energy and input costs; however, persistent inflationary pressures remain in consumer-facing services.
Services inflation remains (and will remain) high
The slower inflation decline in the consumer-facing services sectors is primarily driven by wage growth and labour shortages, which may present structural inflationary risks to the UK economy.
Interest rates likely to decline very slowly
Falling inflation has increased the pressure on the BoE to reduce interest rates; however, this will likely only come when they are content that services inflation have fallen further.
Despite the recent positive economic data and falling inflation, the BoE has indicated a more cautious approach to decreasing the interest rates and kept them as-is in June 2024:
"It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low, and that’s why we’ve decided to hold rates at 5.25% for now."
Andrew Bailey, Governor of the Bank of England
Section 3: Households’ Financial Position is Improving, but Likely to Remain Affected by Elevated Borrowing Costs
Real wages are recovering
The continued growth of wages and declining inflation have resulted in a prolonged improvement in real wages since July 2023, which is expected to continue throughout the remainder of 2024 and 2025, leading to greater levels of disposable income.
A: As the inflation levels started to fall in early 2023 and labour market tightness pushed wage growth higher, real wages started to recover from the contraction of the previous c. 18 months.
B: This recovery in real wages to 2021 levels is not expected to occur until early 2025 at the very earliest, despite persistent real wage growth throughout the coming year.
Household income picture is more complex
In addition to the growing real wages, the overall household wealth levels have been further supported by the Spring Budget’s tax decreases and stabilised debt servicing and housing costs.
Household net cashflow reached 2021 levels for first time
With the continued growth of real wages, households’ cash position has improved above 2021 levels due to a substantial decrease in spending growth rate across all categories and higher disposable income due to wage growth and recent tax cuts.
Consumers are overall £3,500 worse off due to the cost of living crisis
Despite recent improvements, on a cumulative basis, households are still significantly worse off in cash terms due to the prolonged period of falling household cashflow between 2021 and 2023, which will likely take several years to rebound.
- Even though the net cash position exceeds 2021 levels, cumulatively households in the UK are c. £3,500 worse off because of the cost of living crisis
- We project it may take up to four years for consumers to fully mitigate the net cash gap, assuming the return to pre-crisis growth rate of 4%
- Overall, UK consumers are one of the worst impacted by the cost of living crisis in Europe, behind Germany, France and Italy, and on par with the Netherlands
Savings rates are recovering
Recent economic uncertainty and improvements in disposable income from wage growth led consumers to increase their savings to restore finances after increased spending in 2021 and 2022.
- Increased household savings have been driven by growing disposable incomes and precautionary savings due to overall economic uncertainty
- This trend is also driven by elevated deposit rates, which reached c. 5.5% annual interest rates in late 2023
- However, 44% of Britons still had to reduce or stop their savings and investing in early 2024, indicating disparity in financial position across the UK population
Household debt is beginning to stabilise
Despite the overall improvement in cash flow, households in the UK are still struggling to meet their day-to-day expenses and have had to increase their borrowing, whilst also facing higher debt servicing rates.
- Overall household debt levels have been declining slightly, primarily driven by reduced growth in mortgages due to increased interest rates
- However, unsecured debt has been rising and is projected to grow by another 9.4% in 2024, the largest annual rise in cash terms since 1987, indicating continued cost of living pressures on consumers
- This growth has been driven by both younger people below 40 y.o., who are most affected by a rise in rental costs, and semi-professional and lower-skilled white-collar workers
- In addition, elevated interest rates led to a growth in debt servicing rates, which are projected to increase above 6% of disposable income by the end of the year, reaching the levels of 2010 – 2011
The mortgage crisis appears to be over
Elevated interest rates continue to put pressure on servicing mortgage debt. However, most of the low fixed-rate mortgages have already been reset, limiting further negative impact on consumers.
- As interest rates remain high, current fixed-rate mortgage holders will continue experiencing jumps in monthly repayments, with 900k borrowers expected to see an increase of more than £500 in 2024
- However, these borrowers represent only c. 7% of total mortgages, with the majority already reset to higher rates in 2022 and 2023
- Despite ongoing pressures of servicing debt, there will likely be no significant mortgage rate shocks on consumers in 2024 or 2025, which will be further eased with expected upcoming interest rate declines
Section 4: Consumer Sentiment is More Positive, but Spending Growth Remains Modest
Consumer sentiment is recovering
Overall, UK consumer sentiment has recovered over the past 12-18 months across the population, with higher income and younger consumers being the most positive.
1: Falling inflation levels and wage growth (supported by the NMW increase in April 2024) have continued to positively influence consumer sentiment in the UK.
2: Consumers feel less pessimistic about their disposable incomes and debt levels for the first time in the last two and a half years.
3: However, consumers still indicate growing concerns about the overall state of the UK economy, job security and career progression opportunities available.
Consumer spending is not recovering evenly
Consumer spending has demonstrated modest growth over the last six months when compared to 2023, which is partially driven by a rise in prices, with Britons still reducing consumption across some discretionary items.
The UK elections have an impact on consumer spending
The recently announced election on 4th July appears to have had a limited effect on sentiment, with consumers generally optimistic about the potential change of government.
- Overall, voters are optimistic about a potential change in government and their ability to handle key issues of the UK economy
- However, more than 50% of UK voters still expect an increase in taxes regardless of who wins the election
- Younger consumers seem to be most sensitive to the upcoming elections, with 73% stating that it would affect their spending
Section 5: We Expect Significant Growth in Spending During Summer 2024, Followed by Potential Decline at the End of the Year
What is likely to happen to spending in 2024?
There are several factors that indicate consumer spending could be on the cusp of rising significantly again during the summer.
Wage growth and low unemployment: Wages continue to grow, with average earnings rising by 6.0% in the three months to April 2024, while unemployment remains low at 4.4%.
Energy price cap drop: With the energy price cap at its lowest level, gas and electricity bills are thought to have fallen by an average of £20 a month for c. 29 million households.
Summer events: Summer events such as the Euros and the Olympics are likely to fuel spending, with a range of beneficiaries.
Higher savings: The UK savings rate rose in the second half of 2023 to 10.2%, its highest level since the pandemic.
Rising consumer confidence: Consumer confidence is at its highest since Q3 ‘21 amid easing inflation and potential rate cuts, with the largest improvements seen among younger consumers.
Experience spending: There is growing demand for experiences, with 43% of UK consumers indicating they are living in the moment rather than trying to plan for the long-term.
The 2025 picture is less optimistic
Despite the immediate-term optimism, there are several longer term risks associated with the UK economy that may have negative implications for consumers in late 2024 and beyond.
Increase in taxes post-election:
- Despite recent tax promises, the UK government is expected to increase taxation after the election to fund its public sector needs
- Raises in tax levels will indirectly affect consumers, even if personal taxes remain the same, and there will likely be pressure on disposable incomes
Potential consumer overspending:
- The summer events, spending intentions for holidays and experiences and improving economy may lead consumers to spend more than they typically would
- This increased spending will likely add more demand-side inflationary pressures and potentially negatively impact consumers’ personal financial position
- In particular, following the summer and Christmas spending periods, consumer expenditure may be particularly hit in Q1’25
Continued wage growth fuelling inflation risks:
- With unemployment remaining low and inactivity well above its pre-pandemic levels, labour supply shortages will continue supporting wage growth
- This continued growth will fuel cost-base inflationary pressures, especially in consumer-facing services
Longer period of elevated cost of borrowing:
- With the BoE’s cautious approach to reducing interest rates and underlying risks, the cost of borrowing and servicing debt will remain high
- In the event of elevated spending during the summer, this presents a further risk of consumers’ ability to repay debt and meet their day-to-day expenses
"This is not necessarily job-done-and-victory-declared for the Bank of England. The cost of living crisis persists and, with prices in many areas of the economy still increasing faster than the headline rate, many won’t feel better off purely because inflation has hit 2%."
Lindsay James, Investment strategist at Quilter Investors
