A fall in UK consumer spending dampened business activity in August

A fall in UK consumer spending dampened business activity in August

UK consumers cut spending on clothes, DIY and beauty products in August, while business activity eased, in a sign of “collapsed” demand due to the deepening cost of living crisis.

Data released on Tuesday by payments company Barclaycard showed that card spending fell by 1.9 percent between July and August, with consumers becoming more selective about their discretionary purchases as household bills rise.

With inflation at a 40-year high, the figures highlight how the start of Liz Truss’s prime ministership will be framed by rising energy and food prices putting pressure on household finances and rising costs adding to business challenges.

Data from Barclaycard, which accounts for almost half of UK credit and debit card transactions, showed spending on clothes in August was down 1.9 per cent year-on-year and 10.7 per cent month-on-month.

Spending on electronics and home improvement, as well as department stores and health and beauty stores, was also down from the previous month.

It comes as average spending on utility bills rose 45.2 percent in August compared to the same month last year, according to the data, leaving households with less money to spend in other areas.

José Carvalho, head of consumer products at Barclaycard, said the rising cost of living “has clearly led Britons to cut back on some non-essential purchases to ensure they can afford the rising costs of their weekly grocery and utility bills”.

Separate data on Tuesday from consultancy firm KPMG with the British Retail Consortium, an industry body, showed annual growth in retail sales not adjusted for inflation more than halved to 1 percent in August, from 2.3 percent in the previous month.

As consumers cut back on discretionary spending, many businesses suffered. The S&P Global/Cips UK PMI for manufacturing and services fell to 49.6 in August from 52.1 in July and below the current 50.9.

This was the first time the reading fell below 50 – the threshold between contraction and expansion – since January 2021, when the country was in lockdown due to Covid-19.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the figures showed that new Prime Minister Liz Truss “will be dealing with an economy that faces an increased risk of recession, a worsening labor market and continued elevated price pressures linked to rising prices of energy”.

Williamson said demand for consumer-facing services, such as restaurants, hotels, travel and other recreational activities, “is collapsing under the burden the cost of living crisis“.

The final reading for the services sector was 50.9 in August, down from initial estimates of 52.5 and the lowest since February 2021. The corresponding reading for manufacturing, released last week, was 47.3. It marked the worst fall since May 2020, when strict Covid curbs were in place.

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said: “The latest PMI data signals that the economy is on the brink of recession.”

The PMI survey also found that among service providers, operating costs rose sharply and there was evidence of higher wage and salary payments, adding to expectations of more sustained high inflation.

John Glen, chief economist at Cips, said that while port disruptions, Brexit paperwork and shortages were contributing to high inflation, the services sector was “relatively weak” in the face of rising energy bills.

“Utilities will be looking to the new prime minister this week as they hope for a policy-driven solution to cost increases,” he added.

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