Q3 2016

The latest Deloitte Consumer Tracker shows that UK consumers have shrugged off post-referendum pessimism, with consumer confidence returning to a five-year high in Q3 2016. In a sign that Brexit fears have been put to one side Deloitte’s consumer confidence index rose by three percentage points quarter-on-quarter, its largest increase in 18 months.

Five out of the six measures which make up the confidence index rose between the second and third quarters. There were strong gains in consumer confidence regarding job security, job opportunities and career progression. The job security index rose by six percentage points compared to the last quarter after having fallen for three consecutive quarters.

In an inversion of the usual relationship, sentiment among Londoners is running lower than for the rest of the UK. Confidence in London has dropped by three percentage points in Q3 2016 and is now nine percentage points lower than it was the same period a year ago. Voting patterns in the referendum showed a majority of Londoners were firmly in the Remain camp. Given the capital’s dependence on financial services, a Brexit-led downturn could weaken its economy leading to job cuts, falling house prices and a decline in business activity.

Consumer spending overall remains largely stable supported by low inflation. However, expenditure continues to shift from essentials to discretionary categories. Net spending on essentials was flat for the second consecutive quarter, while net spending on discretionary categories rose by one percentage point. Moreover, the gap between leisure and retail spending is narrowing as consumers continue to favour spending on experiences such as holidays rather than on goods.

The strength of consumer spending is reflected in the growth of retail sales since the beginning of 2016, with a 5.5 per cent rise in the three months to August 2016 compared to a year earlier. With the consumer-focused economic fundamentals still showing few signs, if any, of a slowdown since the end of June, we expect retail sales growth to continue into the fourth quarter.

Looking further ahead, the UK consumer faces the prospect of higher inflation and the start of the formal Brexit process in 2017 – two events that pose challenges to consumer spending power and sentiment.

Overall consumer confidence (q/q)*

Previous

Latest

-8%-5%

AuthorsBen PerkinsHead of Research Consumer & Industrial Products020 7307 2207beperkins@deloitte.co.uk

Céline FenechResearch Manager Consumer & Industrial Products020 7303 2064cfenech@deloitte.co.uk

Rebecca ThomsonResearch ManagerConsumer & Industrial Products020 7007 0891rebthomson@deloitte.co.uk

Confidencein level ofjob security (q/q)*

Previous

Latest

-10%-4%

Essentialsspending(q/q)*

Previous

Latest

+5%+5%

Discretionaryspending(q/q)*

Previous

Latest

-3%-2%

ONS retailsales value growthAug-16 (y/y)

Previous

Latest

+0.9%+3.9%

CPI inflation Aug-16 (y/y)

Previous

Latest

0%+0.6%

Key indicators

*Net balances

The Deloitte Consumer TrackerConsumer confidence sees its largest increase in 18 months

Chart 1. Deloitte consumer confidence Net % of consumers who said their level of confidence has improved in the past three months

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Consumer confidenceConsumer confidence returns to a five-year high in Q3 2016In a sign that Brexit fears have been put to one side Deloitte’s consumer confidence index rose by three percentage points quarter-on-quarter, its largest increase in 18 months.

Five out of the six measures which make up the confidence index rose between the second and third quarters.

There were strong gains in consumer confidence regarding job security, job opportunities and career progression.

The job security index rose by six percentage points compared to the last quarter after having fallen for three consecutive quarters.

Chart 2. UK consumer sentiment about personal situationNet % of consumers who said their level of confidence has improved in the past three months

-50%

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0%

10%

Your children’s education and welfareYour job opportunities/career progressionYour level of debtYour job securityYour general health and wellbeingYour household disposable income

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Chart 3. Consumer confidence in job securityNet % of UK consumers who said their level of confidence in job security has improved over the past three months

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0%

Your job security

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2

The Deloitte Consumer Tracker Q3 2016 | Consumer confidence sees its largest increase in 18 months

Consumer confidenceAn inversion of the usual North vs London relationship

Confidence among Londoners fell by three percentage points this quarter and is now nine percentage points lower than it was a year ago.

In the meantime, confidence in the North is at its highest since the series began.

Chart 4. Consumer confidence by regionNet % of UK consumers who said their level of confidence has improved over the past three months

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0%

LondonLondon and South EastMidlands and South WestNorth

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Londoners were also less confident about the security of their jobs.

Given the capital’s dependence on financial services, a Brexit-led downturn could weaken its economy leading to job cuts, falling house prices and a decline in business activity.

Chart 5. Consumer confidence in job security by regionsNet % of UK consumers who said their level of confidence in job security has improved over the past three months

-25%

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0%

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10%

LondonLondon and South EastMidlands and South WestNorth

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Uncertainty among the Chief Financial Officers of the UK’s largest corporates remains high post-Brexit.

Chart 6. Uncertainty% CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high

Source: Deloitte CFO Survey

45%

55%

65%

75%

85%

95%

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3

The Deloitte Consumer Tracker Q3 2016 | Consumer confidence sees its largest increase in 18 months

Consumer spendingConsumer spending remains stable

British shoppers have kept on spending in the aftermath of the vote to leave the EU.

Consumer spending overall remains largely stable supported by low inflation.

Chart 7. Consumer expenditure % change y-o-y, final consumption expenditure, constant prices, SA

Source: ONS

-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%

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However, expenditure continues to shift from essentials to discretionary categories. Net spending on essentials was flat for the second consecutive quarter, while net spending on discretionary categories rose by one percentage point.

Chart 8. Essentials vs discretionary spending in the last three monthsNet % UK consumers spending more by category

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-5%0%5%

10%15%20%

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Essentials Discretionary

Moreover, the gap between leisure and retail spending is narrowing as consumers continue to favour spending on experiences such as holidays rather than on goods.

Chart 9. Category spending in the last three monthsNet % UK consumers spending more by category

-30%-25%-20%-15%-10%

-5%0%5%

10%15%20%

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Retail spending Leisure spending

4

The Deloitte Consumer Tracker Q3 2016 | Consumer confidence sees its largest increase in 18 months

The strength of consumer spending is reflected in the growth of retail sales since the beginning of 2016, with a 5.5 per cent rise in the three months to August 2016 compared to a year earlier.

Chart 10. Retail sales% change in volume and value year-on-year

Value Volume

Aug AugAugAugAugAugAugAugAugAugAug-4-202468

101214

1615141312111009080706

Inflation remains low across most categories, with competition continuing to keep prices down in the grocery sector.

However, while overall inflation in August remained flat at 0.6 per cent, it has been rising since the start of 2016.

Chart 11. Inflation% change year on year

Source: ONS

-4 -2 0 2 4 6 8 10

Food & Non-alcoholic beverages

Clothing & Footwear

Furniture & Householdequipment

Housing, Water & Fuels

Total inflation

Recreation & Culture

Miscellaneous goods& Services

Transport

Alcoholic beverages& Tobacco

Health

Hotels, Cafes& Restaurants

Communication

Education

15/08/16 15/08/15

4.810

4.11.1

2.31.82

1.81.4

2.11

0.80.8

0.7

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UK retailers have seen their costs rise as a result of the introduction of the new higher minimum wage and the fall in the value of sterling.

The key question for retailers is how much of these increased costs they will be able to pass on to consumers while still protecting their margins.

Chart 12. British pound sterling effective exchange rate index

Sep SepSepSepSepSepSepSepSepSepSepSepSepSepSepSepSepSepSepSep

Source: Bank of England

707580859095

100105110

97 16151413121110090807060504030201009998

Consumer spendingConsumer spending remains stable

5

The Deloitte Consumer Tracker Q3 2016 | Consumer confidence sees its largest increase in 18 months

Consumer financeEra of low inflation coming to an end

An extended period of falling prices, which has enabled consumers to increase their consumption despite subdued wage rises, could be drawing to an end.

Consumer borrowing remains high as the UK shopper defies pessimistic post-referendum forecasts.

The unemployment rate has continued to decline and stood at 4.9 per cent in the three months to June 2016.

Chart 13. % Growth in average wages vs CPI Inflation% change year-on-year

Aug AugAugAugAugAugAugAugAugAugAug

Source: Thomson Reuters DataStream.

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0

2

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1615141312111009080706

UK inflation (CPI)Average earnings including bonuses

UK consumer credit – Net unsecured lending to individuals (%y-on-y)

Chart 14. Consumer creditSecured and unsecured lending to individuals (% change year-on-year)

Source: Thomson Reuters DataStream

Aug AugAugAugAugAugAugAugAugAugAug-4-202468

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1615141312111009080706

UK personal borrowing: Dwellings – Net lending (%y-on-y) SADJ

Chart 15. Unemployment rate% change year-on-year

Source: Thomson Reuters DataStream

Jun JunJunJunJunJunJunJunJunJunJun1615141312111009080706

0

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UK LFS: unemployment rate, all, aged 16 & over SADJ

6

The Deloitte Consumer Tracker Q3 2016 | Consumer confidence sees its largest increase in 18 months

OutlookPossible headwinds ahead

Consumers in our survey expect to spend more on essentials in the next three months.

Chart 16. Category spending over the next three monthsNet % UK consumers spending more by category

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-5%0%5%

10%15%

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Essentials Small-ticket items Big-ticket items

Chart 18. UK GDP growth: Actual and forecast (%)

Quarter-on-quartergrowth

Year-on-yeargrowth

Source: ONS, consensus forecasts from The Economist and Deloitte calculations

20172016201520142013201220112010200920082007-7

-6-5

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01

23

4 Forecasts

Growth forecasts remain positive with GDP expected to increase by 1.7 per cent in 2016, although slowing to 0.7 per cent in 2017.

Looking further ahead, two events could pose challenges to consumer spending power and sentiment: the prospect of higher inflation and the start of the formal Brexit process in 2017.

With the consumer-focused economic fundamentals still showing few signs of a slowdown since the end of June, we expect retail sales growth to continue into the fourth quarter.

Chart 17. Consumer indicators% change year-on-year

Unemployment

June 15

June 16

5.5%4.9%

Average weekly earnings growth rate

July 15

July 16

2.9%2.3%

Interest rates

Sep 15

Sep 16

0.5%0.25%

7

The Deloitte Consumer Tracker Q3 2016 | Consumer confidence sees its largest increase in 18 months

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Contacts

Nigel WixceyIndustry Leader, Consumer & Industrial Products020 7303 5007 nigelwixcey@deloitte.co.uk

Ian GeddesLead Partner, UK Retail020 7303 6519 igeddes@deloitte.co.uk

Graham PickettLead Partner, UK Travel, Hospitality and Leisure01293 761232 gcpickett@deloitte.co.uk

About this researchThe Deloitte Consumer Tracker is based on a consumer survey carried out by independent market research agency, YouGov, on our behalf. This survey was conducted online with a nationally representative sample of over 3,000 UK adults aged 18+ between 16 and 19 September 2016.

A note on the methodologySome of the figures in this research show the results in the form of a net balance. This means that in a survey of 100 respondents, assume that 30 reported they are spending more, 50 reported no change and 20 reported they are spending less. The net balance is calculated by subtracting the number that reported they spent less from the number that reported they spent more, i.e. 30 – 20 = 10. This means 10% of consumers reported that they spent more rather than less.