Peter Hemington, corporate finance partner at BDO, looks at why consumer spending cannot be relied upon for growth in 2017 and why the Chancellor must look at policies that rebalance the UK economy for the long term in his Budget this week.
The latest figures from our monthly economic tracker, business trends, suggests that rising inflation, coupled with stagnating wage growth, is causing a sharp slowdown in consumer spending, leaving the UK economy in need of other areas of growth.
Consumer spending has been a significant contributor to the UK economy’s growth since the financial crisis, particularly in 2016. But the latest figures suggest the UK can no longer rely on household expenditure for growth.
BDO’s Inflation Index – part of our monthly business trends report – is well above its long term trend, despite falling from 104.5 to 104.0. The figures reinforce the Bank of England’s prediction that consumer prices are set to rise over 2% this year. With Article 50 to be triggered later this month, inflation could rise further if sterling’s value continues to fall and the price of goods keeps adjusting.
Firms’ employment intentions – indicated by the Employment Index – remain above the long term trend, with the Index sitting at 101.9 for the second successive month. However, despite low unemployment levels, the UK’s on-going productivity problem is causing low wage growth as firms look to employ more staff, rather than investing in the productivity of their existing workforce. Wage growth is likely to soon fall behind inflation, leaving households with less money to spend.
The government must do more to support the economy
With Article 50 soon to be invoked, alarming signals for the UK economy are emerging. Households are having their purse strings tightened by slow wage growth and rising inflation, which means that consumer spending won’t play the major role in 2017 that it did last year. So the government must do more to support the economy and position it for growth in these uncertain times.
We have heard a lot of talk about the government’s recent industrial and digital strategies to invest in infrastructure and technology to drive productivity, but we need to see more immediate action. The budget gives the Chancellor another opportunity to announce smarter and bigger infrastructure plans which will fuel the growth of UK businesses and shore-up confidence in our economy during Brexit negotiations.
Peter Hemington is Partner and Head of Corporate Finance at BDO