UK households have cut back on beer, bread, meat, recreation and domestic appliances since late 2021, according to a Financial Times analysis of official data that points to the impact of the cost of living crisis on consumption.
Real consumer spending has yet to return to pre-pandemic levels in Britain, underperforming the US and eurozone, and contracted in the final three months of 2023, underlining the challenge Prime Minister Rishi Sunak faces in creating a feelgood factor in the economy ahead of the election.
UK households slashed purchases of beer by 15 per cent, confectionery by 10 per cent, meat by 7 per cent, and bread and fruit by 9 per cent each in the two years to the final quarter of 2023, shows an analysis of detailed consumer spending figures from the Office for National Statistics and gross domestic product data.
The trend partly reflects the impact of the pandemic, with consumers returning to spend more on services and less on goods, but it mainly captures weakening spending power stemming from higher prices. The rise in interest rates to a 16-year high has also hit household finances, pushing up mortgage costs and rents.
Consumers spent 15 per cent more over the two years to Q4 2023, the latest quarter for which data is available, although they bought 0.5 per cent fewer goods.
Household spending on gas surged by almost 70 per cent, but consumers bought 10 per cent lower volumes. The volume of food purchased by consumers was also 8 per cent lower, even as spending on groceries increased by 16 per cent over the past two years.
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“The cost of many essential items, such as energy and food, has risen dramatically in the past two years, and wages have not kept up with the large rise in prices. Given household budget constraints, something had to give,” said Tomasz Wieladek, chief European economist at investment company T Rowe Price.
As a result, he added, “households had to cut back on many non-essential items such as goods and luxury services”, as well as on energy consumption, and switched away from more expensive branded foodstuffs.
UK consumer price inflation peaked at a 42-year high of 11.1 per cent in October 2022, while real wages contracted for most of 2022 and 2023. Inflation dropped to 3.2 per cent in February, but prices remain about 20 per cent above their mid-2021 levels.
ONS data shows inflation-adjusted spending on household appliances, such as coffee machines and dishwashers, dropped 19 per cent in the two years to the end of 2023 and was 8 per cent below pre-Covid levels.
Real spending on furniture was down 9 per cent, with fewer purchases of cars, plants, jewellery and insurance. Spending on housing was affected by the property market downturn last year and the “race for space” at the height of the pandemic.
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Overall, household real spending in the final three months of 2023 was 2.4 per cent below its level in the same period of 2019. This compares with an 8 per cent expansion in the four years to the end of 2019.
British households fared worse than others, official data suggests. In the US consumer real spending rose 10 per cent from pre-pandemic levels in the final three months of 2023, and Britain’s performance was weaker than that of the eurozone and Canada.
The sharper contraction in consumer spending in the UK “was probably largely due to the UK’s higher and longer-lasting inflation problem”, said Ruth Gregory, economist at research company Capital Economics, referring to UK prices rising faster than in the eurozone and the US last year.
“The UK had the worst of both worlds, a big energy shock like the eurozone and worse labour shortages like the US,” she added.
Wieladek said the hit to consumption mattered especially in an expected election year, because squeezed households would “blame authorities”.
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With the Conservative party about 20 points behind Labour in opinion polls, Sunak is hoping for better economic conditions to underpin his election campaign.
Gregory said it made “sense for Sunak to wait as long as he can” before going to the country, adding: “The recession in the consumer sector may be over and the recovery will start to gather pace from the second quarter.”
ONS data shows higher food and energy prices left little room for other purchases in the two years to the end of 2023: inflation-adjusted spending on personal care, which includes hairdressing and nail salons, dropped 4 per cent. Spending on recreation and culture also fell, including an 18 per cent decline for sports equipment and a 5 per cent drop for games and hobbies.
Education and communication registered rises in real spending in the same period and relative to pre-pandemic levels, reflecting long-term shifts in consumption habits. Real spending on travel and restaurants rose compared with the end of 2021, but was still below its Q4 2019 levels.
Mark Boyd-Boland, partner at consultancy LEK, said that in addition to cutting discretionary spending, consumers had “sought to moderate what they bought at the grocery store”, buying “a few less of the nice things” and downgrading to supermarket own-label items.
Boyd-Boland said that while the point at which “household budgets will feel better” was approaching, the benefits of lower inflation would take “some time to come through because of the ongoing impact of the interest rate increases”.
Source: Economy - ft.com
