October 4, 2022
Fall in UK consumer spending impacts business activity in August

UK consumers cut spending on clothing, DIY and beauty products in August, while business activity contracted, in a sign of “collapsed” demand due to the acute cost of living crisis.

Data released Tuesday by payments company Barclaycard showed that card spending fell by 1.9 percent between July and August, with household bills rising as consumers are becoming more selective about their discretionary purchases.

With inflation hitting a 40-year high, the figures highlight how Liz Truss’s premiership will begin with rising energy and food prices straining households’ finances and rising costs adding to business challenges.

Barclaycard data, which represents nearly half of UK credit and debit card transactions, showed spending on clothing in August was down 1.9 per cent compared to the same month last year and 10.7 per cent in the month.

Spending on electronics and home improvements, as well as department stores and health and beauty stores, was also down compared to the previous month.

According to the data, the average spending on utility bills in August was 45.2 percent higher than the same month last year, leaving households with lower spending in other areas.

Jose Carvalho, head of consumer products at Barclaycard, said the rising cost of living was “apparently leading Brits to cut back on some non-essential purchases to ensure they could meet their weekly grocery store and household utility bills.” able to bear the rising cost”.

Separate figures on Tuesday from advisory firm KPMG with the British Retail Consortium, an industry body, showed annual growth of non-inflation adjusted retail sales more than halfway to 1 per cent in August, from 2.3 per cent in the previous month.

By reducing discretionary spending by consumers, many businesses suffered. The S&P Global/Cips UK Purchasing Managers’ Index for Manufacturing and Services declined to 49.6 in August, from 52.1 in July and was below a flash reading of 50.9.

It was the first time the reading fell below 50 – the threshold between contraction and expansion – since January 2021, when the country was in a Covid-19 lockdown.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the data showed incoming Prime Minister Liz Truss “will be dealing with an economy that is marred by increased risk of recession, a deteriorating labor market and persistently elevated price pressures.” Rising cost of energyā€¯.

Williamson said demand for consumer-facing services, such as restaurants, hotels, travel and other recreational activities, was “falling under the weight of the cost of living crisis”.

Line chart of Purchasing Managers' Index, below 50 = Most businesses reporting contraction showing UK private sector business activity contracted in August

The final reading for the services sector was 50.9 in August, down from initial estimates of 52.5 and the lowest since February 2021. The corresponding reading for manufacturing published last week was 47.3. This marked the worst contraction since May 2020, when stricter COVID restrictions were in place.

Samuel Tombs, UK lead economist at consultancy Pantheon Macroeconomics, said: “The latest PMI data are a sign that the economy is on the verge of recession.”

The PMI survey also showed that among service providers, operating costs rose sharply and there was evidence of higher wages and salaries being paid, adding to expectations of more permanent higher inflation.

Sips chief economist John Glenn said that while port disruptions, Brexit paperwork and shortages were all contributing to high inflation, the services sector was “relatively powerless” facing ever-increasing energy bills.

“Service businesses will be eyeing the new prime minister this week as they look for a policy-driven solution to rocket costs,” he said.

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