Verum Household Discretionary Spending Tracker: Q1 2015 analysis

Growth in consumer discretionary spending weakens for first time since Q4 2013 but 8.3% overall rise in 2014 is largest increase for two decades.

Key points from analysis

• New ONS data (released on 1 July 2015) shows that consumer discretionary spending rose 9.0% year-on-year in Q1 2015, but this was lower than the 9.6% increase in Q4 2014 - the first slowdown in spending growth since Q4 2013.

• Total spending by households on essentials fell by 5.2% in Q1 2015 compared with Q4 2014, but spending on discretionary non-essential products and services fell by 5.8% led by lower spending on restaurants and hotels (-10%), recreation and cultural activities (-10%), household goods and services (-9%), and alcohol and tobacco products (-8%).

• Year-on-year, discretionary spending continued to rise, albeit at a slower pace in Q1 2015 compared with Q1 2014. Spending grew fastest on recreation and cultural activities (+8%), household goods and services (+7%), and clothing and footwear (+6%).

• Household discretionary spending is being supported predominantly by a continued reduction in savings and an increase in borrowing, as well as rising incomes, (particularly from property), wages and salaries.

This release contains an analysis by Verum Financial Research of quarterly data published by the ONS on household spending. From this data, Verum calculates UK households' discretionary spending (total spending less essential living costs) to compile theHousehold Discretionary Spending Tracker.

Growth in discretionary spending

Source: Verum Financial Research

By comparing year-on-year quarterly changes, an analysis of ONS data shows that household discretionary spending grew by 9.0% in Q1 2015 compared with 9.6% in the previous quarter. While this still represents significant growth in discretionary spending, it is the first reduction in the rate of growth in spending since Q4 2013.

Households' discretionary spending rose 9.0% year-on-year in Q1 2015 while households' disposable income increased by only 5.0% over the same period.This suggests that further rapid increases in discretionary spending are not sustainable without growth in incomes. Part of the higher growth in discretionary spending is due to slower growth in spending on essential items which increased by only 0.7% year-on-year. Buta major contributor to higher non-essential spending is reduced saving by households and an increase in non-mortgage borrowing.

Strong rise in borrowing supports growth in spending

An increase in household discretionary spending has been supported by a continued increase in net consumer lending excluding mortgage lending. Between Q1 2009 and Q1 2011, households were repaying unsecured borrowing, but since Q2 2011, unsecured borrowing by households has risen steadily.

Source: Bank of England/Verum Financial Research

Fall in savings also contributing to higher spending

Source: ONS/Verum Financial Research

The proportion of income saved, known as the savings ratio, fell from 5.4% in Q4 2014 to 4.6% in Q1 2015. Since Q4 2006, the proportion of income saved averaged 7.6%.

Households are therefore spending rather than saving a higher proportion of income.

Discretionary spend rising as % of total income

Source: Verum Financial Research

Household discretionary spending continues to rise both as a proportion of total spending and as a proportion of household disposable income. This means thathouseholds are spending a lower proportion of total income and total spending on essential living costsincluding housing, utilities, food, clothing, transport, communications, insurance and interest payments.

However, the recent resumed rise in motor fuel prices since reaching a low in Q4 2014, has resulted in consumers reducing their spending on motor fuels and cutting back on non-essential car use. The benefit of lower fuel costs to household discretionary spending has therefore ended unless fuel prices fall again.

Property accelerates as driver of rising incomes

Source: ONS/Verum Financial Research

While income growth is still not the main driver of higher discretionary spending, household incomes continue to show promising signs of growth. Incomes from both wages and salaries and self employment have turned up, but it is income from property which is driving the growth in gross household incomes.

Income from employment wages and salaries accounts for 70% of total household disposable income and income from property accounts for only 13%, but while wages and salaries have increased by 19% cumulatively since Q1 2007, income from property has grown by 60% in current prices.

Comment

Robert Macnab, director of research at Verum, which carries out the analysis, said:"Higher house prices, rising employment and growing wages have all resulted in an increase in consumer confidence in the future outlook of the UK economy and this has in turn resulted in further growth in discretionary spending by households.

"Higher levels of confidence in future economic prospects mean that households are more willing to reduce the level of income they save as a precautionary backstop or safety net. It also means that households are more willing to borrow to make major purchases such as motor vehicles and other major durable goods.

"Higher house prices have indirectly fed through to higher incomes from property. A rising proportion of households are investing in buy-to-let property and this combined with any commercial property owned by households is resulting in a rise in income from property rental. Excluding London, the average UK domestic property rental value in May 2015 was £738pcm compared with £686pcm in May 2014 - an 8% increase.

"Ensuring that the growth in household discretionary spending continues will require income from wages, salaries and self employment to also continue rising. The main threat to future discretionary spending growth remains a rise in interest and especially mortgage rates. Households paid £60.8 billion in interest payments in 2014 compared with £98.7 billion in 2008. An unexpectedly sharp rise in interest rates would quickly curtail the growth in household discretionary spending."

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For further information, please contact

Verum Financial Research

Robert Macnab, Research Director

Telephone: +44 (0)843 289 5932

Email:robertm@verum-research.com