UK economy takes a hit as consumer spending slumps further

A woman shops in a supermarket in London.
A woman shops in a supermarket in London. PHOTO: REUTERS

LONDON (BLOOMBERG) - UK consumers cut back on spending for a third month in July as house-price growth slowed sharply, dealing yet another blow to the economy.

The broad-based weakness is being blamed on a squeeze on pockets as inflation outpaces wage growth as well as concerns about the health of the economy. The latest figures leave both household expenditure and the property market at their weakest in more than four years.

A report from IHS Markit and Visa showed that consumer spending dropped 0.8 percent year-on-year, with clothing, household goods, food and transport among the worst hit. Home-price increases weakened to an annual 2.1 per cent in the past three months, its slowest since April 2013.

The two downbeat reports come days after the Bank of England downgraded its economic outlook and Governor Mark Carney warned that Brexit uncertainty is weighing on business and households. BOE Deputy Governor Ben Broadbent said Friday that the "maximum rate of pain" for consumers will soon pass, though any improvement could be modest. The central bank also cut its forecast for wage growth last week.

In addition to the income squeeze, consumer expenditure has been hit by concerns among shoppers about the broader outlook after the economy slowed dramatically in the first half of the year.

"Alongside the renewed squeeze on household budgets, uncertainties linger over the direction of the economy," said Annabel Fiddes, an economist at IHS Markit. "This makes it seem unlikely that consumer spending will recover in the current challenging conditions."

The July consumer figures showed a 6 per cent increase in spending at hotels, restaurants and bars. Markit said this may be partly related to an increase in "staycations," with the weaker pound making foreign holidays more expensive. Sterling, little changed on Monday, has fallen 13 percent since the Brexit vote in June 2016.

According to the Halifax report, house prices slipped 0.2 per cent in the three months through July against the previous quarter. That's a fourth consecutive decline, the first time that's happened since 2012. On an annual basis, the pace of growth is now just a fifth of its peak in March 2016. The market has also been damped by tax changes in 2016 and affordability concerns after years of rampant house-price gains.