British consumers have stopped taking on more debt and started saving their money again, in a sudden reversal of two trends that propped up economic growth in Britain over the last year. If the trend continues — and Credit Suisse analysts Neville Hill and Sonali Punhani told clients recently they believe it will — it will hurt one of the main drivers of GDP growth in the UK: consumer spending.
Since the EU Referendum of 2016, Brits have done two things with their money:
- Go shopping on credit, racking up debt.
- Reduce their monthly saving to historic lows.
That has kept a rising tide of consumer cash washing through the economy.
But the tide is about to turn, Hill and Punhani say. “We increasingly judge that the UK consumer is retrenching and rebuilding its saving rate, having allowed it to plummet in the wake of the Brexit vote. That retrenchment may be due to consumers … realizing that the damage to their real incomes from the Brexit vote is permanent, not transient.”
Here is their first piece of evidence: The rate of household savings has climbed again recently, after hitting sudden record lows. That might imply that consumers want to start saving again, after two years of not really caring:
The second piece of evidence is what’s happening to consumer debt. In the post 2008-era, consumers made a yearslong push to reduce their debts. That changed in 2016, when consumers seemed to become a bit more relaxed about taking on credit, and household debt levels went up again. But over the last couple of months, the Credit Suisse team argue, Brits have suddenly gone shy of debt again:
Taken together the two sudden changes suggest that consumers are frightened of the future, and want to hoard cash and get rid of their liabilities to others.
The obvious consequence of this is that consumers are spending less. As Business Insider noted on May 10 and April 29, consumers have pulled in their horns and retail sales have gone down.
Brexit had an unusual effect on the UK economy: It lowered the value of the pound, suddenly making everyone poorer
Brexit has had an unusual effect on the UK economy. It suddenly lowered the value of the pound, driving inflation, which raised prices faster than wages and made everyone poorer. The CS analysts believe consumers were willing to tolerate that if it only lasted a short time. And the rise in debt was more of an affect from rising interest rates and shrinking real incomes (the actual value of the money you keep after inflation has been accounted for), not consumers’ willingness to blow out their credit cards and overdrafts.
But now, Hill and Punhani say, consumers seem to believe that the post-Brexit period of weakness in income growth isn’t temporary. It’s permanent.
“That’s important, as it suggests that the shift from household de-leveraging to re-leveraging in the last few years was a consequence of the shock to household incomes after Brexit rather than a decisive change of behaviour on the part of households. Once again, the performance of borrowing and savings in 2016-17 looks peculiar and anomalous.
“… But the squeeze on real incomes has not reversed, or proved temporary. As that becomes apparent, the risk is that they reverse that unusual and excessive cut in the savings rate, and seek to resume the process of deleveraging,” they wrote in a recent research note.
They regard this as an “underlying domestic weakness in the UK.”
“That would be significant. Despite a modest pick up in real household disposable income growth, a rising savings ratio would imply poor consumer spending and provide a headwind to overall UK growth,” they say.