Economic update: consumers under pressure

There are signs of weakness in the UK’s economic performance. In our last economic update, we observed inflation rising quicker than earnings, a decrease in productivity and a slight downward revision in economic growth for the first quarter of 2017. To this picture, we can now add rising household debt.

But there’s also material for optimists in this update. Employment remains at record levels, and Purchasing Managers’ Index (PMI) figures – a well-regarded early indicator of economic output – point to stronger growth in Q2.

Weak growth in Q1…

GDP growth in the first quarter of 2017 is estimated at 0.2%, down from 0.7% in Q4 2016. This was the slowest rate of quarterly growth for a year.

The economic slowdown came from the service sector. In Q1 2017, service sector output increased by only 0.1%, compared to growth of 0.8% recorded in the previous quarter. As the service sector makes up about 80% of the economy, the 1.1% growth in the construction sector and manufacturing’s 0.3% did not go a long way to counteract the slowdown in services.

As people could afford less…

The ONS reported that the slowdown was mainly due to consumers slowing down their spending on services. In our previous economic update, we talked about how slower consumer spending is the likely result of a drop in people’s purchasing power: as wages fail to keep up with inflation, consumers can afford to buy fewer things.

And indeed, the quantity of retail purchases made by people in the three months to May 2017 grew at its slowest pace since 2013, just as CPI inflation rose to 2.9%, its highest rate since June 2013.

And got into more debt

In 2016 household debt started to increase again as a proportion of income. It stood at 145% of disposable income in Q1 2017 – its highest level since Q2 2012.

The number of people whose debts have become unmanageable has been on the up again since mid-2015. Individual insolvencies in England and Wales in Q1 2017 were 16% higher than a year earlier, and the highest quarterly total since Q2 2014.

But Q2 growth might be better?

In spite of these signs of weakness in Q1, some important indicators were positive in Q2. The Purchasing Managers’ Index (PMI) is one of them. The Markit/CIPS PMI is based on a monthly survey asking companies about output, new orders, stock levels, employment and prices. PMI compares the current month with the previous one. The PMI is produced faster than comparable official data. It often anticipates the direction of official figures, although the methodology is different.

It is likely that manufacturing output did well in Q2, as indicated by the average PMI level over the April-June 2017 period – the best registered for three years.

However, a strong performance in manufacturing alone is unlikely to compensate for a weak service sector, as we said earlier. The latest service PMIs for April and May 2017 were not as strong as the manufacturing ones, but still above the average of the last 12 months – and so a decent performance is possible. Although with a month of data still missing, we can’t say either way with much confidence.

For the complete picture, look out for the June service PMI, which is out tomorrow 5 July.

This article was originally published in the July edition of the Library’s Economic Indicators paper. The monthly publication provides a snapshot of key economic data covering: growth, labour market, finance, borrowing, trade, exchange rates, business, retail and housing. Individual pages are updated through the month as new data come out.