With the clock now ticking on Brexit, Britain may soon find itself in a countdown to its first recession since the Great Recession of 2008.
The stalwart British consumer, hammered by falling living standards and with a predilection for personal debt over savings, may finally be giving up the ghost, robbing the economy of its principle engine of growth.
UK March retail sales data, due this Friday, looks poised to mark an outright decline in volume in the first quarter compared to the fourth of 2016, a development which may well have been prompted by a tightening in credit by UK banks, which walked into the largest post-war recession a decade ago largely unawares.
“The significance of a downturn in retail sales to Britain’s economy cannot be overstated,” Carl Weinberg of High Frequency Economics wrote in a note to clients.
“A recession now, with Brexit uncertainty all but certain to crimp investment and economic growth - and probably eviscerate the City and its revenues from the heart of the economy - is the last thing the nation needs.”
Britain triggered Article 50 of the Lisbon Treaty at the end of March, meaning it should exit the European Union by April of 2019.
The UK Visa Consumer Spending Index, released last week, showed a fall of 0.7 percent month-on-month in March. The data, which is adjusted for both calendar and seasonal effects as well as inflation, showed lagging sales in food, clothing and household goods.
The Bank of England (BOE) said in March that credit card debt rose to a record 67 billion pounds in February, an annual 9.3 per cent increase and the fastest rise since the financial crisis.
Unsurprisingly, banks are trying to scale back on their risks.
A BOE poll of major lenders showed that they cut credit access in the first three months of the year, and expect to cut it further in the second quarter. The percentage of banks saying they would cut back on consumer credit in the second quarter is the highest since 2008, when banks slashed credit in a delayed and ultimately unsuccessful attempt to limit damage from the recession.
British households, which face a squeeze in real compensation due to sluggish wage growth and the inflationary effects of a weak pound, have used credit to smooth consumption, but that tactic is one which may have reached its limits. UK household savings rates were at all time lows last year of just 3.3 percent.
“Looking ahead, it is hard to see wage growth heading back up towards 3.0 percent. Job creation is so weak that workers have little bargaining power, despite low unemployment,” Samuel Tombs of Pantheon Macro wrote in a note to clients.
“Firms also will seek to make savings from their wage bills to pay for the apprenticeship levy — a new tax equal to 0.5 percent of payroll, introduced this month. Accordingly, real wages look set to fall by about 0.5 percent this year, constraining consumption.”
Credit has filled the gap, and terms have been particularly easy, a phenomenon the BOE’s Financial Policy Committee noted.
“An easing in credit supply conditions appeared to have contributed to the growth in consumer credit, with intense competition in some segments of the market,” it said in minutes of a March meeting released earlier in April.
Banks may well have noted the same phenomenon, as well as their regulator’s concern, and decided to tighten the screws themselves to get in front of any consumer-led downturn.
Britain escaped the widely expected recession in the wake of the vote last year to leave the EU, in part because consumers held their nerve and also because businesses did not move immediately to cut back on investment to the extent many expected.
But with the clock ticking now, and with huge uncertainty over the future role of London's financial center in its relations with Europe, a consumer slump could easily turn into the first recession since the financial crisis.
The banks may be better positioned to weather a recession but a downturn will only make an already fraught pre-Brexit period more dangerous and volatile.