A new labour market means a new consumer market…
The 2016 EY ITEM Club report on Consumer Spending forecasts a slowing in the rate of growth in consumer spending as the benefits of low energy and food prices run out, inflation starts to rise, interest rises finally start to move upwards and recent fiscal changes begin to impact disposable income negatively. However, the challenges for consumer oriented businesses go beyond coping with a slowdown. The changes at a dis-aggregate level in the consumer market will in many cases be more significant for business prospects than the overall slowdown in growth.
As my blog on the changing labour market identified, the most important potential impacts that businesses should evaluate are:
- Differences in the growth of incomes by income segment with middle earners likely to be squeezed while low earners do relatively better;
- Continuing differences in income growth by age group, older people are expected to fare relatively well while younger workers are likely to find their growth in earnings slower, the impact on over 25s of the introduction of the National Living Wage( NLW) merits careful attention;
- How relatively low wage growth will impact consumer behaviour, should we expect increasing price sensitivity and a continuation of the focus on value?
- The impact of flexible labour market conditions on consumer psychology, will lower job security impact expenditure volumes and types?
- How expected rises in interest rates will play out across consumer segments, given different distributions of assets and liabilities, and across products – how will car and other durable sales react to less attractive financing conditions?
- The approach to granting credit in an economy with more self-employment, less job security and the increasing importance of older workers.
…and hence very different growth prospects for goods and services.
The primary consequence of the changing environment is significantly different prospects for market growth for individual categories of goods and services.The recovery in discretionary spending observed last year, supported by strong growth in real incomes, should continue in 2016 and beyond. For example, spending on transport in 2016 is predicted to exceed the already strong rate of growth seen in 2015. New car registrations reached a record high of 2.63m in 2015, reflecting cheap financing and the continued release of pent-up demand that had accumulated post-2008. Indeed, spending on cars rose by almost 10% in volume terms. With real incomes set for another healthy rise in 2016 and financing likely to get even cheaper, car sales are forecast to dip only slightly from 2015’s record high. However, as pent-up demand is exhausted and interest rates start to rise, the pace of growth in car sales is likely to tail off from 2017 onwards. But transport’s share of real spending will also be boosted by petrol prices remaining longer for longer.
Similarly, leisure (encompassing recreation and culture and restaurants and hotels) should continue to enjoy at or above-average growth in spending as incomes continue to rise and people have more money for spending on non-essentials. Meanwhile, a humming housing market characterised by robust price growth and rising transactions will support household goods purchases like furniture.
Health-related products such as medicines, prescriptions and glasses should benefit from an ageing population, with the same development supporting that element of housing spending devoted to home maintenance (DIY and the services of plumbers, electricians etc.). Health and home maintenance are the only categories where elderly households spend more per person than UK households as a whole.
Granted, the same breakdown of spending by age suggests that clothing and footwear sales are likely to lose out from an older population, particularly sales of men’s fashion. But as an important element of discretionary spending, this category should still post strong volume gains over the next year or two.
In nominal, or cash, terms, a continued imbalance between the supply of, and demand for, homes is likely to push up rents, increasing growth in cash spending on housing. But cuts in energy bills will have an opposing effect, with all of the “big six” energy firms having already announced cuts in gas bills to take effect early this year.
In some respects, the shape of the nominal forecast differs from that for volumes. Spending on recreation and culture is predicted to see slower growth in cash terms, reflecting the tendency for the price of new technology to decline as production ramps up. And the share of spending devoted to food is likely to continue falling. This reflects the lagged effects of the prolonged decline in agricultural commodity prices, continued pressure on traditional supermarkets from discount retailers and the tendency for the share of spending on necessities to decline as incomes rise.
Time for detailed analysis and planning
Consumer growth is slowing, the labour market is changing and preferences continue to evolve. The key to success in this environment is detailed analysis at the segment and product level. Averages will provide little insight, companies need to maximise the insight form their available data to support the creation of detailed and effective execution plans.