British consumers are being asked to defy gravity again

Brits have endured a long stretch of rising costs and many of those who faced the end of competitive mortgage deals a year or so ago have now refinanced at higher rates.

Simon Wolfson, chief executive officer of Next Plc, said recently that he had not been this optimistic about the retailer’s outlook for seven years. Then this week, Ken Murphy, CEO of Tesco Plc, said he was seeing a “gentle improvement” in consumer sentiment.

The landscape is certainly better than it was a year ago, when, despite some positive signs, UK shoppers were still in the grip of inflation. But we should still be wary of threats to any green shoots.

The welcome news is that the cost-of-living crisis is dissipating. Food prices in the country rose by 4.5 percent in March, the lowest level since February 2022, according to data provider Kantar. A year ago, they were increasing by around 17 percent. Murphy said Tesco’s assumption was for grocery inflation to stabilize at a low single-digit percentage for the remainder of the year.

Although there are still some flashpoints — cocoa, coffee, olive oil and potatoes — consumers are managing those high prices by controlling their spend elsewhere, often trading down to private labels or shopping in discount stores. And energy costs, although high by historic levels, are becoming less of a burden.

Meanwhile, UK wages are rising ahead inflation, which should stretch household budgets further. The National Living Wage rose 10 percent from the start of this month. While this puts pressure on retailers’ cost base, it should deliver more money into the pockets of their customers. What’s more, we are probably at the end of the rake hiking cycle, potentially bringing some comfort to borrowers.

Against, this rosier backdrop, what could go wrong?

The biggest concern is employment. One of the factors that lifted consumer spending in 2023, along with fatter pay packets, was that many Brits who wanted to work extra hours to cover higher bills could do so. The labour market has since cooled, with vacancies dwindling. So far, this hasn’t translated into rising unemployment, but Wolfson said last month he was watching the measure carefully. Caution over the jobs market is the reason Next is projecting that full-price sales will expand by just 2.5 percent this year, compared with a 4 percent gain in the year to January 2024.

Some of the top-up payments that companies made to staff to help them meet higher bills will also be absent this year. This should be offset by a lower cost of living. But another risk is that inflation doesn’t fall as quickly as anticipated, either because of wet weather damaging British crops, energy costs creeping up again given the rise in oil prices or disruption to shipping routes.

Even if these hazards are avoided, there may simply be a lag between consumers seeing their household incomes expand and loosening their purse strings.

Brits have endured a long stretch of rising costs and many of those who faced the end of competitive mortgage deals a year or so ago have now refinanced at higher rates. Meanwhile, the effect of tax cuts and lower energy bills in early April won’t be felt until later this month. Consequently, some shoppers may not yet feel comfortable changing their behaviors, for example by eating at restaurants outside of holidays and seasonal events. They might still prefer buying private labels than big brands, particularly for household staples that are locked away in the cupboard rather than on show in the home.

According to KPMG’s Consumer Pulse Survey, half of the 3,000 people polled said they had been forced to rein in their non-essential spending in the first quarter, with eating out the most common cut-back. Improvements in GfK’s measure of consumer confidence have also stalled.

And there’s another peril around the corner: the forthcoming general election, which could create volatility in in the months running up to the vote.

There may be nervousness as campaigning gets underway in earnest. Yet a decisive Labour victory could lift spirits as it initially did with Tony Blair’s win in 1997. This would be a useful fillip ahead of Christmas, particularly if combined with inflation continuing to fall, rate cuts and the labour market holding up.

But the feel-good factor might not last. Some Labour policies such as VAT on fee-paying schools would be unhelpful to the middle class, the engine of spending. Having to dedicate more of their incomes on school fees may mean that there is less left over for outlays such as holidays, though this would likely be felt more in 2025.

For now, there is a good chance of the consumer backdrop gradually improving as the year progresses. If the sun shines and Brits enjoy the Olympic Games and 2024 UEFA European Football Championship, the effects could be even more pronounced.

But if 2023 taught us anything, it’s that people don’t always behave the way that fundamentals suggest. British consumers defied gravity last year. The danger is they don’t live up to the lofty expectations in place for 2024.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry.

Views are personal, and do not represent the stand of this publication.

Credit: Bloomberg