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Overstretched consumers are being relied on too heavily to boost the economy but their piggy banks have run dry and a slowdown is on its way later this year, says Chris Godding, chief investment officer at online stock broker Tilney Bestinvest.
Godding warned that consumers could no longer be relied upon to keep economic growth ticking along as they are ‘tapped out’ thanks to rising inflation without a corresponding pay rise.
Godding thinks there will be a ‘moderation in inflation’ and a slowdown in economic growth based on the fact that the savings ratio fell to an historic low of 1.7% in the first three months of the year due to a lack of disposable income. This week the Office for National Statistics reported a surprise fall in inflation to 2.6% in June, down from 2.9% in May, the first drop since October 2016.
Brits have also taken on high levels of debt that is no longer sustainable. Godding said US consumers spent 80% of their income, while consumers in the UK spend 130%.
‘We believe the UK consumers are tapped out,’ he said. ‘To put fuel in the tank you have to either increase leverage, increase salaries, or decrease savings. They have taken the savings component and turned it into consumption but there is no more fuel in the tank and retail sales are starting to suffer.’
He said he had been concerned about the combination of high leverage and low savings ‘which are never a good combination’, since the spring.
Economic issues are exacerbated in the UK by the Brexit process and concerns around the outcome of negotiations.
‘We are going into a slowdown in gross domestic product (GDP) growth when consumers are more stretched than ever and that is never good,’ said Godding.
It is not just the UK that is facing a slowdown in growth in the latter half of 2017, with Godding predicting the US and China to also suffer.
While the UK is struggling with growing levels of debt, Godding pointed to China's 'credit impulse', a measure of the flow of credit as a proportion of GDP, which peaked at the end of last year and has now gone into decline.
Godding said this fall was likely to bite in the second half of the year, after a first half that has seen China's growth exceed expectations.
‘China has 6.5% target growth and the first two quarters were 6.9% so the second half will be slower,’ he said.
In the US, president Donald Trump's difficulties in enacting his campaign pledges has raised questions over the prospects for his planned tax cuts and infrastructure spending, key flanks of his plan to accelerate economic growth.
The waning of the ‘reflation trade’ in the US will be the cause of its slowdown, as people lose faith in president Donald Trump’s ability to fulfil his pledge to double US GDP from 2% to 4%.
‘The reflation trade needs to come back in to play for equities to make good progress in the second half and there are few signs of that,’ said Godding.
‘China is stepping up fiscal spending to offset the negatives of the credit impulse but we need more activity out of the US and that will not happen until 2018, and the impact of it will not be felt until 2019.’