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- Credit Suisse’s Sonali Punhani argues that the UK consumer could pose the biggest downside risk to solid growth in 2018.
- “As inflation falls and real income rises, consumers can either increase their consumption or their savings,” she writes.
- If consumers decide to save rather than spend, it could be bad news for the broader economy.
LONDON — Britain’s consumers pose the biggest downside risk to the country’s economy in 2018, the UK economics team at Swiss lender Credit Suisse said in a note circulated this week.
Writing on Wednesday, Sonali Punhani, an economist at the bank, argues that consumer spending — which has been one of the main drivers of the UK’s economic growth in the years since the financial crisis — now presents the “biggest risk” to Credit Suisse’s higher than consensus forecast for GDP in 2018.
“In 2018 we expect Brexit-related headwinds to domestic demand to abate, and the economy to regain traction on strong global and European growth. We forecast growth of 1.8% in 2018, higher than consensus of 1.4%,” Punhani writes.
“The biggest risk to our call of above consensus growth is the consumer.”
Having risen above 3% late in 2017, driven higher by the weak pound in the aftermath of the Brexit vote, inflation is now widely expected to fall away fairly rapidly. That is expected to coincide with increasing wages for UK workers.
The combination of the two is likely to see real wages increase for the first time since early 2017, giving Brits more disposable income. What they do with that money could be crucial for the economy in the coming 12 months, Punhani argues.
“As inflation falls and real income rises, consumers can either increase their consumption or their savings. Our central scenario is that they will do the former in part because consumer confidence is improving. But the risk is they do the latter, in which case consumer spending will be subdued and will put downside risks to our growth forecasts.”
Britain’s savings rate fell sharply in the aftermath of the Brexit, with consumers deciding to keep spending, rather than saving money for a rainy day. This is thought to be at least partially down to the fact that more than half of the country’s voting population saw Brexit as a material positive, and therefore saw no reason to alter their behaviour
Now the economic downsides of Brexit are become more real — growth is slowing noticeably for example — it could be that British consumers start to put more money away for a rainy day. This, Punhani argues, would be bad news for the economy as a whole.
Citing the Bank of England’s unofficial blog, Bank Underground, Punhani writes (emphasis ours):
“Consumers don’t respond in the the same way to good and bad income surprises. Survey evidence finds that an unanticipated fall in income leads to consumption changes which are significantly larger than those associated with an income rise of the same size. Between 2011 and 2014 the annual NMG survey of households, commissioned by the Bank of England, found that an unexpected increase in income leads to an average rise in spending of just 14 pence for each extra pound (MPC=0.14), whereas spending falls by 64 pence for every pound (MPC=0.64) that household income unexpectedly decreases.
“This could limit the scale of real consumption growth we see when income growth picks up.”
To be clear, such a slowdown is not Credit Suisse’s base case. The bank believes ultimately that “rising incomes should support consumer spending this year.” However, it is certainly something to keep an eye on.
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