The latest Barclaycard data reveals that consumer spending growth softened post-Brexit, with the Underlying Spending Growth Index dropping sharply in July to 5.3%, the lowest level since January 2014. Dennis Jose and colleagues at Barclays point out in their August 9 research piece titled “Barclays UK Spend Trends – Post Brexit: A slip but not a slide” that the severity of the imminent recession depends on the extent to which consumer confidence falls, despite headlines of the apocalypse.
Barclays Home Improvement Index dropped to lowest level since June 2014
Barclaycard published the data underlying Barclays’ U.K. Spending Trends, providing insight into U.K. consumer spending across 34 retailer categories in 11 industries. Barclaycard processes nearly half of U.K. credit and debit transactions.
Jose and colleagues point out in their report that consumer spending growth was 2.6% y/y last month, indicating softer spending post-Brexit versus the 3.6% clocked in June and May.
The Barclays analysts point out that the Underlying Spending Growth also dropped dramatically last month. They argue that if the relationship between U.K. consumer confidence and underlying spending growth is maintained, the longer-term economic uncertainty may have negative implications for underlying spending growth.
The analysts also tracked their Home Improvement Index, which incorporates spending growth data from DIY, Furniture, and Floor Covering stores, considered alongside the Halifax House Price Index. Jose and team point out that last month, the Home Improvement Index dropped to 1.4%, the lowest level since June 2014, suggesting a further deceleration in house price growth in the coming months following the Brexit vote:
Investors currently pricing in a deceleration in spending growth
Jose and team point out that following the referendum and vote to leave, investors have been aggressively de-rating domestically-focused U.K. stocks. The analysts highlight that on a longer-term perspective, relative to the USD-exporters, valuations are now at the lows of the financial crisis. Compared to their Barclaycard spending growth data, investors appear to be pricing in a dramatic deceleration in U.K. consumer spending growth to -1%. The Barclays analysts believe it’s too early to assess, though the initial indications suggest that investors may be a bit too pessimistic about the prospects for consumer spending in the U.K. post-referendum:
The analysts believe the magnitude and speed with which household confidence declines is the final ingredient in determining the duration and depth of the imminent recession. They note that during past U.K. recessions, given the importance of private consumption in the U.K. GDP, typically both firm and household confidence levels have declined materially. Of note, the analysts point out that on the business front, they could see sentiment deteriorating at a strikingly fast pace and reaching financial crisis levels.
However, the analysts believe that now consumer confidence also appears to have taken a severe knock. They caution that if consumer confidence continues to decline at this pace, one could witness a more pronounced recession than currently anticipated. The Barclays analysts anticipate that the trajectory of growth will stabilize into a shallow, prolonged recession, averaging growth of -0.1% q/q in 2017 and translating into calendar growth of 1.5% in 2016 and -0.5% in 2017.