UK Economic and Consumer Outlook 2023

The UK has narrowly avoided a recession in 2022 and, according to the most recent forecasts, the UK is still reeling from the effects of the previous government’s “mini-budget”, ultimately avoiding a technological recession that seemed inevitable in November, slow/stagnation. indicated growth.

Inflation is expected to come down, but this is unlikely to be a smooth path to the 2% target, even though the Bank of England is now predicting it. Our view is based on the belief that structural challenges to the UK economy, including an aging population, inflation-driven wage pressures and H2 pressure on energy prices, mean that inflation will be more difficult to unwind.

Consumer confidence has risen slightly in light of improving economic conditions and wages for low-income earners c. 6%, which partially protects against sustained high inflation. There is a new perspective that suggests that upper-middle-income households are likely to be the most severely affected, and thus may experience the most significant changes in purchasing behavior because:

They have received limited support from the government targeting low-income households. A significant proportion are exposed to mortgages with significantly increased payment terms due to rising interest rates. And they typically work in positions and sectors with the lowest wage growth rates (e.g. public sector) and highest risk of layoffs (e.g. digital).

The headline figures point to strong Christmas retail trading data on a similar basis for 2021. However, this obscures the fact that 2021 has been the year of COVID and indeed volumes have declined.

Despite the negative outlook, 2023 offers opportunities due to shifts in consumer purchasing behavior. However, to be successful, brands must align closely with the needs of their existing customers. We believe we are focused precisely on the new exploration of value (not necessarily price) and the desire for personalized offers, flexible loyalty programs and bundled offers.

Macroeconomic situationGDP forecast

According to our most recent forecasts, the UK economy will not experience a technological recession. However, low or zero growth is expected for at least 12 months.

Factors mitigating downward pressure on forecast GDP

Warm winters and sourcing of alternative energy supplies from Europe reduce price pressure on energy Bank interest rates are expected to peak at 4.5% rather than the previously predicted 5.0% Economy stabilizes and interest rate spreads narrow after government replacement China’s COVID-19 zero policy likely to reverse Reversal of supply chain bottlenecks Easing inflation forecasts

Inflation will most likely come down in 2023, but it will likely be more difficult to unwind to target levels than BoE and OBR predict.

Why Inflation Could Continue Beyond 2023

An aging population will lead to a net decline in the labor force, increasing the cost of labor inputs. Significant pressure on wage growth due to strikes and a general labor market squeeze. Energy prices likely to rise in the fourth quarter as Europe is unable to build up reserves, coupled with growing energy demand. from ChinaEmployment

The unemployment rate remains low at 3.7%. However, labor shortages continue as the inactive population of working age increases significantly.

The March budget focused on a number of policies aimed at stimulating workers re-entering the workforce.

Expansion of pension tax credit Additional support for child support for dual-income parents Disability support and welfare measures

These changes are expected to stimulate return to work, primarily among early retirees and those caring for their children. Some support is available to people who are ill for a long time, but encouraging these groups to get back to work is expected to be more difficult.

Long-term illness is the single largest driver of workplace disengagement, accounting for 60% of the increase in workforce inactivity.

wage increase

Real wages have fallen across all income levels, with high-income households being the most protected, while low-income households are partially protected by higher wage growth.

Consumer ImpactConsumer Confidence

Consumer confidence has been at near historic lows since mid-2022. However, sentiment has improved since September.

“Despite cost-of-living pressures, 63% of consumers say they are confident with their household finances and 70% are confident they can live within their means, both reaching their highest levels since July 2022.”

UK Consumer Spending Report January 23, Barclaycard

Comparison with GFC

This period of economic turmoil differs from the financial crisis in many areas. Crucially, there are expectations that stagnation will be prolonged and real incomes will face their biggest decline in decades. However, unemployment is expected to remain low.

impact on the home

Upper-middle-income households are most likely to see the biggest drop in real disposable income, meaning this group is expected to experience the biggest change in purchasing behavior.

“Inflation has hit the hardest against middle-income earners who are under pressure as they will be most affected by higher interest rates and mortgage costs, but they will not benefit from assistance packages.

Professor Adrian Pabst, NIESR Deputy Director of Public Policy

mortgage payment

In 2023, 5 million households’ mortgage payments are projected to rise significantly, requiring an additional 8% of their income to serve on average.

Consumer Response and Opportunity Retail Sales

Headline sales figures point to strong quasi-consumer growth in Q4 2022, but this overshadows the fact that sales volume has declined significantly.

“Christmas exceeded expectations, but it would be wrong to win too much… The headline figure is gross, not net, due to inflation when retail sales fell 6%.

Fraser McKevitt, Head of Retail and Consumer Insights, Knight Frank

consumer spending

Consumers today are reacting differently to GFC1. They cut down on cheap luxuries like dining out, but protect spending on valued areas like sustainability.

Key Differences Between Consumer Buying Behavior and GFC Today

Consumers are looking to cut back on dining out spending, but this has expanded by 10% during the GFC. The decline in holiday spending is not as severe as during the GFC period (down about 40%). Pandemic sustainability and other social issues remain high on the expanding consumer agenda, even at a time when real incomes are declining.

At a time when real disposable income is declining, consumers need to adjust their interactions with the retail sector and businesses must be tactful to adapt to the changes.

Consequences of Declining Disposable Income

Reduce trade-down frequency/volume with cheaper retailers Stop trade-down spending with less premium product lines within the same brand

geographical differences

UK consumers are willing to trade for lower prices, as evidenced by currently having one of the highest consumption rates (43%) of private label goods in the world. implication

At an overall level, consumption is likely to decline in 2023, but there are still opportunities for businesses to capitalize on changes in consumer buying behavior.

The views and opinions in this article are solely those of the authors and do not necessarily reflect those of Teneo. It is provided to stimulate thought and discussion, not legal, financial, accounting, tax or other professional advice or advice.

Sources 1/ https://Google.com/ 2/ https://www.teneo.com/2023-uk-economic-and-consumer-outlook/ The mention sources can contact us to remove/changing this article

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