The mystery of the disappearing consumer. Will spending grow in 2020?

Consumers have been reluctant to spend …

Announcements of job losses and store closures have been so commonplace over the last 12 to 18 months that news that would once have sent shockwaves through the markets, such as the worst retail sales performance on record in late 2019, now have a muted effect. No-one is in any doubt that consumers are under pressure.

But are things as bad as the headlines suggest? It is certainly true that, compared to the 1980s or 1990s, cash pay grew very slowly over the last decade. However, in the last year earnings growth has consistently outpaced inflation, unemployment remains low, and job vacancies are at reasonable levels. Against this steady backdrop, it is perhaps surprising that consumer spending has been growing more slowly than incomes, reversing the pattern between 2015 and 2017 when household spending growth outpaced the increase in household income.

… as confidence falls …

Although consumer and business confidence both fell after the 2016 Brexit referendum, consumers recovered more of their poise and their outlook was generally more positive than that of businesses until the middle of 2018. Paradoxically, as real incomes have grown since then, consumer confidence has fallen. There was evidence of a bounce back in confidence after the general election but not to the levels typically associated with strong spending growth.

… and the labour market softens.

As is often the case with consumer behaviour, a significant part of the explanation can be found in the labour market. While pay settlements were ticking up from the middle of 2018, the rate of job creation was slowing, and the number of vacancies actually fell through 2019. The labour market continues to be very difficult to read: rising pay and falling employment is not the normal relationship we would expect.

Worries over Brexit may also have weighed on consumer confidence. According to the National Centre for Social Research, 56% of people expect Brexit to be bad for the economy compared to 21% who expect a positive impact. This compares to 45% and 30% respectively after the referendum, suggesting Brexit expectations did hit sentiment.

With mixed signals, it is perhaps unsurprising that consumers, for the majority of whom the labour market is the source of the majority of their income, decided to proceed cautiously – the growth in household indebtedness came to an end and spending growth has slowed over the last 18 months.

But could things be about to change?

In this environment, with the market hard to read, perceptions assume an even greater significance. The continuing flow of announcements about job losses on the high street together with the uncertainty over Brexit most likely weighed down on consumer spending throughout 2019.

With political uncertainty reduced after the general election and the direction on Brexit clear, is it possible that consumers will up their spending? The early post-election surveys of both business and consumer sentiment have been positive, raising hopes of an upturn in activity. Further support can be found in the December labour market performance with over 200,000 jobs created in the last three months – a reversal of the trend that saw job numbers fall in the previous two reports.

Before we get too excited, we shouldn’t forget that the outlook is still uncertain in at least two areas. First, while the UK has left the EU, the details of the future relationship are still to be worked out. And second, the policy programme of the new Government is still vague at this point – it is unlikely we will have much more clarity before the Budget on 11 March.

Despite improved confidence, I suspect that businesses will curb their enthusiasm for now, holding off on major new commitments until the Budget, or even maybe until more detail on the future trading relationship emerges. Consumers may be more willing to strike out if the labour market stays strong and even more so if the budget offers other incentives to spending. All eyes on the Chancellor to see if he can pull any rabbits out of the hat on 11 March.

If he can, then there is a possible upside to current consensus economic forecasts that could be led by consumers. Businesses should aim to ensure they have the ability to respond quickly if demand starts to turn up.