Brakes could go on consumer spending as confidence falls

THE last prop supporting the economy could be kicked out in the coming months with growing warning signs that consumers will stop spending and start saving, hitting sales growth and risking a recession.

Business investment has been falling for some time, factories are struggling as the world suffers and manufacturing declines, and Britain’s GDP fell by 0.2pc in the three months to June.

It is possible that consumer spending, which makes up the biggest chunk of the economy, could now grind to a halt too as confidence fell this month.

GFK’S regular survey fell to minus 14 for August, down from minus 11 in July.

It has not been lower since the eurozone crisis of 2013. Most worryingly for the economy, the assessment by households of their own finances slid sharply in the survey, indicating that economic uncertainty is making shoppers hit the hold button on spending.

If this index gets any worse, analysts fear it could tip the UK into recession.

“To see this dropping is a concern – it proves we are feeling a bit rattled. My concern is that this is an early warning signal of what is to come,” said Joe Staton at GFK. “As we become more unsure and unsettled into the period up to October, unless Boris Johnson pulls something out of his hat, I cannot see any indicators on the horizon that will make [confidence] pop back up.”

A second quarter of falling GDP would put the UK officially into recession.

“Unless there is major good news impacting the hearts and minds of consumers, my concern is this [indicator] will fall, and if it falls people will stop spending and the brakes will come on the economy, as we saw at the beginning of the last downturn,” he said.

So far businesses have kept on hiring even as they cut back on investment spending, driving employment to record highs, unemployment to lows not seen since the Seventies, and wage growth to the strongest in 11 years.

However, prospects are deteriorating even further, according to Lloyds Bank’s business barometer, a survey of companies. Overall confidence in the outlook fell to its lowest level since the eurozone crisis, while bosses’ assessments of trading prospects ahead is now at levels last seen in the financial crisis and recession a decade ago.

The European Commission’s sentiment surveys also point to weakening business and consumer confidence.

“There are reasons not to be worried yet,” said Gabriella Dickens at Capital Economics. “Strong employment and wage growth suggest consumers have the ability to spend, although their willingness to spend may falter if the chances of a no deal rise further.”

The outlook and political uncertainty “raises concern that the consumer sector may soon succumb to the malaise that has taken hold in the manufacturing sector”.