Weekend reading: The UK consumer is on the brink

My musings, then some good reads from the web.

Something remarkable has happened. The UK consumer has finally woken up to the financial crisis, the public deficit, spending cuts, and tax rises.

Now I’m not saying there’s been no pain in the UK in the past three years. Jobs have certainly been lost, and some have already seen the loss of publicly-funded benefits and perks. And it’s easy to forget here in London that house prices more nationally have actually fallen about 20% – in a sustained way – in some areas such as the North and Wales.

But in general, the UK consumer has been remarkably resilient.

When I wrote early last year about how the UK was booming, I was thinking mainly about our export economy — the rapid upswing in manufacturing and a recovering financial sector. I admit I didn’t appreciate the extent to which lower mortgage payments meant that far from struggling, the great majority of UK households had even more money to spend.

Theoretically, that is still the case. But something seems to have changed with the VAT rise that came in at the start of the year – perhaps abetted by the arctic snow that closed down UK high street for Christmas. Having gotten out of the spending habit for six weeks, the UK consumer may be going cold turkey.

Retailer after retailer has been reporting plunging sales, with Dixons, Mothercare, and John Lewis the latest to stumble back to command with a bloodied casualty report in hand. One analyst says today in the FT:

“This is the worst I can remember seeing in about 30 years. Since the middle of January more or less, retail has fallen off the edge of a cliff.”

Reasons abound. Beyond that VAT rise, there’s the shocking statistic that real disposable incomes in the UK have fallen for the first time in 30 years. And good luck boosting your salary by getting another job:

News that staff turnover has hit a five-year low is hardly surprising when you consider the state of the UK labour market. People with household bills to pay are not going to leave their jobs until they have a decent job to go to.

Unemployment is rising, public spending cuts are on their way, and those companies which are increasing output are simply increasing overtime rather than hire new people.

The other shoe to drop, as our American cousins inexplicably say, could be renewed pressure on house prices, with the Bank of England warning that loan defaults are rising:

The Bank predicts the total number of mortgage defaults will rise during the next three months as fears intensify that the cost of living will remain high and interest rates will rise.

In its Credit Conditions Survey, it suggested that lenders were concerned about “the potential impact of increases in interest rates on default rates”.

Now I am not one of those bloggers who regularly writes doom and gloom stories. In fact, I’ll admit to being surprised by how quickly the UK consumer seems to have turned. After a while, you start to wonder if the bell really tolls for the Spend Now, Pay Never population.

House prices plunged in the US and unemployment soared, but not here. Ireland’s ridiculous credit boom and four-fold increase in house prices took it to the edge, but London prices are now nearly back to the peak. Other poster children of the good times like Iceland and Spain have also clearly suffered. Only the UK and Australia seem to have escaped the hangover.

In Australia’s case, that’s not hard to understand: the country is stuffed full of resources in the middle of a commodity surge, and the population is relatively small.

But the UK has dwindling natural resources in the North Sea, and while its main driver of growth – the financial sector – got back on its feet faster than any predicted, it’s still not close to covering over the gaping hole its collapse left in the nation’s finances.

No, I think the average UK citizen has simply willed away a worse slump. After well over a decade without a recession and with huge swathes of the population made heady by soaring house prices and easier money from the public purse, they didn’t think it could happen here – and for several years that self-belief has been self-fulfilling.

It’s probably too soon to be sure the chickens have come home to roost. Much of the pain in the spending cuts is pushed out into the future (such as changes to retirement ages, and shifts to the inflation measures used), and I’m doubtful whether most people are aware of them. And while taxes are rising and curbs to easy money like child benefits for the middle classes and over-generous housing benefit – not to mention persistent inflation – is now clipping consumers’ spending power, interest rates are still low, which is acting like a daily soothing infusion of morphine into a sickly patient.

From an investing standpoint, one thing I’d urge is you don’t take the UK stock market to be a proxy for the UK economy. Around three-quarters of the earnings of the FTSE 100 are generated overseas, and the rest of the world is doing fine. Having swallowed some painful medicine via a proper house price crash, even the US is finally on the mend – a recovering consumer appetite there could keep company earnings headed higher for years.

As for the UK, it seems to me we’re in the midst of a moment akin to when somebody turns on the lights at a house party or in a sweaty nightclub, and for a moment you see what the party really amounts to.

But whether we’ll have the morning after the night before or else switch the lights back off and resume our unending weekend-bender remains to be seen.

From the money blogs

• What would happen if everyone indexed? – Swedroe/Moneywatch
• Relax: Doing less with your investments – The Portfolioist
• Why do cash ISAs outnumber share ISAs? – Simple Living in Suffolk
• How to avoid price anchoring – Gen Y Wealth
• Nowcasting with Google – The Psy-Fi blog
• Do you spend windfalls differently to income? – Frugal Dad
• Why the rich get richer – The Digerati Life
• Review: Superscrimpers – A Grain of Salt
• Which UK industry sectors pay the most tax? [graphic] – Tax Fix
• Emergency preparedness on a shoestring – Get Rich Slowly
• Inflation is hiding in smaller package sizes – Len Penzo
• US unemployment has definitely turned [graphic] – Clusterstock
• Why you should pay off your mortgage – Moneywatch
• How to flush $299 down the toilet [old] – Money Musings
• 7 things you must do this week – Money.co.uk

Money Maven roundup

• Wealth Pilgrim suggests some cheaper ways of borrowing money
• Canadian Finance blog investigates O’Leary funds [Canada]
• The Military Wallet unearths a Netflix Military Discount [US]
• Joe Taxpayer reveals Who Pays No Tax [US]
• The Military Wallet on Contributing Too Much to an IRA [US]

Mainstream media

• The history of US finance [graphic, eventually] – FT Alphaville
• How the US spots future world leaders – BBC
• Neil Woodford: Some shares are ‘ludicrously’ cheap – Motley Fool
• Junior ISAs: A sophisticated gimmick – Merryn/FT
• Last-minute tax planning before April 5th – FT
• Push for pre-contracts in UK homebuying – FT
• Universal state pension looks like being £155… – Telegraph
• …but will you get the pension you deserve? – Independent
• Ignore mortgage early repayment charges at your peril – Independent
• Last-minute top-paying ISAs – The Guardian
• The Spanish holiday home collapse continues – The Guardian

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