Consumers may give surprise boost to weak recovery

LONDON Wed Apr 11, 2012 7:21am BST

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LONDON (Reuters) - Britain's consumers could spring an economic surprise in 2012, helping avert a new recession by loosening their purse strings and bringing relief to retailers forced to adapt to a new world of austerity shopping.

With consumer morale only edging off record lows, the government's spending cuts still biting deep and rises in petrol prices eating into people's budgets, a revival in household spending would seem to be anything but a safe bet.

But consumer goods producers are ramping up production, anticipating Britons may want to spend a little after years of restraint and another slump in consumption last year.

"The key point is that 2011 was a special year," said Kevin Daly, UK chief economist at Goldman Sachs. "It was something of a perfect storm for real disposable income because of an unusual combination of relatively weak wages, weak employment growth, high inflation and tax increases."

The scars left by the recession will prevent a full blown return of excessive "retail therapy" on credit cards: The slump left Britons poorer and eager to cut back debt, while a meagre recovery leaves little room for bumper wage rises.

Nonetheless, Goldman Sachs predicts consumer spending will rise by 1.3 percent in 2012 after a drop of 1.2 percent last year, still weak compared to an average annual rise of 3.8 percent in the 10 years before 2008, but well above the 0.5 percent predicted by the government watchdog the Office for Budget Responsibility.

Such an increase would turn consumers into a driver for growth - albeit anaemic - as their spending accounts for 60 percent of all demand in the economy. Other economists have started revising up their consumption predictions too.

Until now, the government and business lobbies have argued that exports and investment would be the new sources of growth - all part of an effort to rebalance the economy away from its dependence on financial services and the consumer sector.

"Ironically, given all the talk of rebalancing, if the economy is to recover this year it is likely to be consumer driven," analysts at Barclays said in a note.

SQUEEZE

Britons have cut spending back sharply since the 2007/2009 financial crisis as many endured the worst squeeze in living standards in more than a generation. The Institute for Fiscal Studies estimates middle-income earners will have lost over 7 percent of their income by 2013.

Bank of England policymaker Martin Weale said in a recent speech consumer spending per head was down more than 8 percent from its 2007 peak, though real income was only some 5 percent lower, as fearful Britons increased their savings.

But there is scope for extra spending once the public mood turns. The national savings ratio stood at 7.7 percent in the fourth quarter of 2011, compared with a long-run average of 6.6 percent, so there is room for it to fall further.

"In overall terms it's more ultimately about confidence than (having) the absolute cash," said Ian Cheshire, chief executive of Kingfisher, Britain's biggest home improvement retailer. "If there's a compelling reason for people to buy a product the cash is there."

With banks busy repairing their balance sheets, shopping on credit card or overdraft is not an easy option anymore. All this makes a fall in inflation crucial to boost purchasing power.

The Bank of England expects inflation to ease below its 2 percent target by the end of this year, falling steadily from last-year's peak of 5.2 percent.

Average wage growth at 1.4 percent in January was well below inflation of 3.6 percent. But data compiled by Thomson Reuters' Incomes Data Services showed that pay deals have picked up markedly, indicating higher wages may be in the pipeline.

BARGAIN HUNTING

There are signs of a shopping revival, especially if value for money is to be had. Consumer spending rose for the first time since mid-2010 in the final quarter of 2011 and retailers and restaurants enjoyed strong business around Christmas.

The rise around the turn of the year was down to household goods, more durable high-value items, said Nomura economist Philip Rush. "That probably reflects pent-up demand," he said.

Many Britons postponed non-urgent expenses for repair or replacement but this was coming to an end, Rush said.

Stretched finances remain an issue and low-income households still need to tap into savings or stretch overdrafts further to make ends met, said Chris Williamson for research firm Markit.

But Markit's surveys show the willingness to spend on big-ticket items like a holiday is at its highest since December 2010, right before a hike in value-added tax kicked in.

Not all retailers will benefit equally, and for some any uptick in spending comes too late: In March, British video games retailer Game GMG.L became the latest household name to fall by the wayside.

Analysts reckon retailers with online sales as a high or growing proportion of their total sales are the likely winners, while the losers are likely to have too many stores, a weak Internet strategy and be burdened with high debt levels.

And the cautious consumer culture fostered through what has been the slowest recovery since the 1930s are likely to stick.

"One of the differences between this recession and the last one back in the late eighties, early nineties, is that access to value is easier now. Access to value has never been easier for consumers," said Jim McCarthy, chief executive of Poundland, Europe's biggest single price retailer.

"The good feeling of saving money is permeating the DNA of consumers and they get a feel good factor about saving money."

An analysis by the Office for National Statistics showed Britons moved to cheaper product lines during the 2008/2009 recession when shopping for clothes or shoes, as volumes grew faster than values.

The travel industry has also noticed a new thriftiness. "No matter what their budget is, customers are increasingly looking for a holiday at a fixed price where they don't have to worry about how much they're spending," TUI Travel chief executive Peter Long told Reuters.

Any consumer revival faces plenty of risks and one of the big unknowns is the effect of the towering debt pile run up before the crisis.

Household debt has barely fallen, standing at over 1.4 trillion pounds - more than 1-1/2 time real disposable income.

But while the OECD think-tank sees the compulsion to pay down debt as a major break on consumer spending, others such as BoE policymaker Ben Broadbent have voiced doubts as the largest part of this debt is mortgages and overall wealth remains little changed.

There are also good reasons for 2012 to be a special year.

Britain's retailers are optimistic they will get a boost from a packed roster of events this summer including the Queen's Diamond Jubilee celebrations, the Euro 2012 soccer championships and the London 2012 Olympic Games.

"The British consumer given a reason to celebrate is particularly resilient and will save for those and will make sure that they have a decent time," said Poundland's McCarthy.

(Additional reporting by Matt Scuffham, editing by Mike Peacock)

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