The U.K. economy has been holding up in large part on the backs of consumers, but the recent historic vote to leave the European Union could change all that, according to a report in The Wall Street Journal.
Currently about 60 percent of the gross domestic product in the U.K. comes from consumers spending on goods and services. That has kept the economy humming for the last few quarters, but the buying power of consumers is likely going to diminish on the heels of the Brexit vote.
Take real wages, for starters. Employees in the U.K. have already suffered from a squeeze on salaries ever since the financial crisis and while real wage growth has been around 2 percent, it’s largely because inflation has been around zero. The steep decline in the sterling could result in an increase in inflation, with The Wall Street Journal pointing to HSBC’s forecast for inflation in the U.K. to rise 4 percent next year. With the cost of goods getting more expensive and wages being squeezed, that could create a situation in the U.K. where consumers rein in spending and thus hurt the British economy.
It doesn’t help that consumer confidence was already waning before the Brexit vote, but got worse after the vote to leave the European Union. A GfK poll following on the heels of the vote showed the biggest drop in confidence in the last 21 years. Confidence declined among all areas, including personal finances and the economy.
The shaking confidence on the part of British households could prompt more people to increase their savings and spend less, which will also impact the economy. The household savings rate in the U.K. has fallen back down to pre-financial crisis levels at 5.9 percent, but it could creep higher, partially because a lot of U.K. households have debt. The Bank of England said debt in the U.K. stands at 1.3 times disposable income. It peaked at 1.5 times disposable income in the 1980s and 1990s.
On June 23 the world was shocked when U.K. voters chose to leave the European Union, sending global markets down and taking the sterling along with it. Since then reports abound about the potential for a recession in the U.K. as a result of the vote.