Southampton: Inflation causing consumer slowdown, warns BDO

A fall in consumer spending and high inflation is slowing growth in the UK economy, according to the latest Business Trends report by accountants and business advisers BDO LLP.

The latest report suggests that rising inflation, coupled with stagnating wage growth, is causing a sharp slowdown in consumer spending, leaving the UK economy in need of other areas of growth. Consumer spending has been a significant contributor to the UK economy’s growth since the financial crisis, particularly in 2016. But the latest figures suggest the UK can no longer rely on household expenditure for growth.

BDO’s Inflation Index is well above its long term trend, despite falling from 104.5 to 104.0. The figures reinforce the Bank of England’s prediction that consumer prices are set to rise over 2% this year. With Article 50 to be triggered later this month, inflation could rise further if sterling’s value continues to fall and the price of goods keep adjusting.

Firms’ employment intentions – indicated by BDO’s Employment Index - remain above the long term trend, with the Index sitting at 101.9 for the second successive month. However, despite low unemployment levels, the UK’s on-going productivity problem is causing low wage growth as firms look to employ more staff, rather than investing in the productivity of their existing workforce. Wage growth is likely to soon fall behind inflation, leaving households with less money to spend.

The confidence of the UK’s manufacturing sector remains buoyant, however, with both its Optimism Index - which indicates how firms expect their order books to develop in the coming six months - and its Output Index – which indicates how businesses expect their order books to develop in the next three months - rising to 102.2 and 105.1 from 96.4 and 97.7. The sector has really benefited from the currency depreciation with exports rising up to 4% since sterling’s fall.

Malcolm Thixton, BDO's Southampton lead partner, said: “Alarming signals for the UK economy are emerging ahead of a defining moment for the country. Households are having their purse strings tightened by slow wage growth and rising inflation, which means that consumer spending won’t play the major role in 2017 that it did last year. So the government must do more to support the economy and position it for growth in these uncertain times.

“We have heard a lot of talk about the government’s recent industrial and digital strategies to invest in infrastructure and technology to drive productivity, but we need to see more immediate action. The Budget gives the chancellor another opportunity to announce smarter and bigger infrastructure plans which will fuel the growth of UK businesses and shore-up confidence in our economy during Brexit negotiations.”

BDO’s New Economy report, which makes a number of policy recommendations for a thriving post-Brexit UK economy, calls on the Government to increase funding to support investment and help businesses modernise themselves for the challenges ahead.