Brexit Plows into British Consumers, Economy to Spiral Down

Consumer confidence plunges the most since 1994.

Britons’ economic sentiment, already sagging since the summer of 2014, has dropped after the Brexit vote at the steepest rate since 1994!

We can’t blame them. The pound sterling plunged 25% over the last 12 months in anticipation of the Brexit vote, and in its aftermath. A bevy of usual suspects, including Goldman Sachs, Deutsche Bank, and Citigroup, are now proclaiming that the pound could fall another 7% to 11%. Deutsche Bank figures the pound, now at $1.29, could drop to $1.15 by the end of the year.

The initial plunge after Brexit was a reaction to Brexit, they say. But now there’s a second wave of selling on the way in reaction to the Bank of England’s reaction to Brexit.

Forecasters have a history of being wrong, but the current level is real. The destruction of the pound may be good for UK exporters, but it’s terrible for consumers. They buy a lot of imported stuff, and that stuff is about to get more expensive. And forget about going abroad this summer. Can’t afford it anymore.

The financial prognosticators – normally not a doom-and-gloom crowd – weren’t shy about dooming and glooming. Daiwa Capital Markets in a note titled, “Political Anarchy, Economic Calamity,” added some bitter flavors:

The UK is “in the midst of its deepest political crisis since at least the Second World War, with a vacuum at the top of Government.” At the same time, “the Leave campaigners have no plan how to actually put the Brexit vote into practice.” They’re “displaying a woeful ignorance of the EU’s rules, and appear completely naïve about the motivations and red lines of the UK’s EU counterparts…. And while they think that the EU will be able to cut the UK a special deal, they are deluded.”

All the while, EU Leaders have displayed what is, for them, remarkable unity….

But for the UK economy, “this uncertainty is clearly a massive negative,” with a recession now being “the consensus call”:

We expect a sharp contraction in investment due to the hit on business confidence and significantly lower consumption growth as real incomes get squeezed by rising inflation resulting from the sharp depreciation in sterling (which we expect to fall further from here) and rising unemployment as firms adjust workforces downwards. At the same time, uncertainty will hit construction activity and real estate transactions – and any falls in house prices will serve to put further downward pressure on consumption growth.

And that boost to exports due to the crushed pound? Forget it. It’s “unlikely to boost exports significantly, not least given the uncertainty over the UK’s future trading arrangements.”

The situation could still get worse than Daiwa’s forecast, the note said, with the economy deteriorating more sharply, inflation rising faster, and investment grinding down:

This is particularly true for investment from overseas, where uncertainty about whether the UK will continue to maintain access to the Single Market, a key reason why the UK has the second largest stock of foreign direct investment in the world, is likely to see foreign firms freeze investment plans.

Given the UK’s current account deficit of 6.9% of GDP, this lack of foreign investment “is also potentially dangerous for sterling given the UK’s need for large inflows of foreign capital to pay its way.” At the same time, “attracting the required foreign capital is going to be much more difficult post-referendum.”

Amid this political and economic uncertainty that may hang around “probably years to come,” British consumers have lost their mojo.

According to the special post-Brexit GfK Consumer Confidence Barometer (CCB), the core index plunged to -9, from an already low -1 just before the vote. It was the steepest plunge since December 1994. It was down 16 points from the halcyon days of June 2015, when the index still stood at +7.

These aspects got hammered in particular:

  • “General economic situation” over the last 12 months dropped to -19, from -13 just before Brexit, and from +4 a year ago.
  • “General economic situation” over the next 12 months, oh my! 60% expect it to worsen; only 20% expect it to improve! So the index plunged 15 points to -29, last seen during the euro debt crisis in 2011 and 2012. It’s down 33 points from a year ago. The index has been deteriorating since the post-Financial Crisis high in the summer of 2014. Another drop of this sort will plant it in Financial-Crisis gloom.
  • “Major purchases” dropped 12 points to -3 and is down 19 points from a year ago. “Now is a good time to save” hit the highest point since October 2008. This doesn’t bode well for consumer spending.

The confidence of households with incomes between £25,000 and £50,000 ($32,000-$65,000) took the biggest hit, plunging 16 points. So there will be real consequences, among them:

Our analysis suggests that in the immediate aftermath of the referendum, sectors like travel, fashion and lifestyle, home, living, DIY, and grocery are particularly vulnerable to consumers cutting back their discretionary spending.

With business investment entering the deep-freeze until some modicum of certainty returns to the political and economic environment in the UK and its trading relationships, and with hiring grinding to a halt until further notice, solid consumer spending would be a godsend. But no. With this bashed consumer confidence, gloomy outlook, and intentions to save more and spend less, given all the uncertainty, the UK economy looks to enter a world of hurt – just when global demand is already languishing.

It’s not like Europe doesn’t already have enough problems, including a blooming banking crisis. Among the worst is Deutsche Bank, whose bond-buyback miracle-nonsense earlier this year flopped miserably, and whose shares and CoCo bonds plunged. Read…    I’m in Awe at How Fast Deutsche Bank is Coming Unglued

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  38 comments for “Brexit Plows into British Consumers, Economy to Spiral Down

  1. ML says:

    I have written elsewhere, i have a blog on a site that attracts so I am told 1.5m visitors a year, that much of what is currently happening in UK is a smokescreen.

    Some UK property funds have suspended redemptions because they do not have enough liquidity without selling properties to meet investor demands for withdrawing funds. Investor withdrawals are to do with wanting the money to buy shates in better value quoted property companies whose share prices have slid sharply in the recent upward surge in the FTSE 100. Property funds having cut their values by about 5-7.5%. Both property funds and quoted propcos are valued by the same small band of valuation surveyors whose opinions underpin pricing. Property funds are valued more often than propcos so investors are getting an early warning. But surveyors have been concerned for some time that the commercial property market has been overheated so what better excuse than Brexit to reduce their opinions.

    As for consumer spending generally, again Brexit is a good excuse for companies to hold back on hiring, wage growth, etc. The government’s Living Wage idea to increase the minimum wage predated the referendum and has been causing consternation across the board as companies wrestle with rising costs versus intense competition and pressure on pricing.

    I am not suggesting that Brexit won’t have some impact on consumer confidence, of course it will as would any change in the status quo, but I do think that much of the drop in confidence owes a great deal to Brexit being used as a smokescreen.

    • nick kelly says:

      The steepest one day drop ever in the pound is impressive for a mere smoke screen – or could there be fire also?

    • Richard says:

      I would love to know more about your blog. How can I access it, please?

    • OutLookingIn says:

      “Brexit being used as a smokescreen”.

      You are very correct. The entire global economy has well and truly, started on the downward skids over a year ago. Since then the main global, fundamental indicators have gotten nothing but worse.

      The current situation between the UK and the EU is being used as a convenient excuse to “point-the-finger” and deflect attention away from the eroding state of the global economy. With its attendant highly strained financial sector.

    • Intosh says:

      Smokescreen, convenient excuse, diversion, scare tactics. All true.

      The pound diving is just the typical work of speculators. Fundamentally, nothing really changed, except now we have a piece of paper where “51.9% Leave – 48.1% Remain” appears.

  2. ML says:

    Another two reasons for consumer spending becoming depresssed is that there has been much discussion about the imoact on demand of the rise in renters (residential property) (including more younger adults people living at home with rheir parents) and them not needing to buy so much stuff; also there has been a drop in product quality without a commensurate reduction in price. The growth markets in recent years have been experiential: eating out in restaurants rather than buying clothes.

    Demand and spending is polarising. It has been for years. A widening gap between those businesses that have got what it takes and the rest.

    • Petunia says:

      I agree with you. Brexit will be the best thing for the UK even if the realization is slow in coming.

  3. Thomas Malthus says:

    Death Watch

  4. VegasBob says:

    Anybody who dares to challenge the supremacy of the elites is going to experience the wrath of the ruling class.

    Yet, Switzerland chose to go it alone some years ago, and they are doing just fine economically.

    I suspect the Brits will ultimately do just fine as well, once they are free of the shackles and the tyranny of the EU.

    Wouldn’t it be ironic if they wound up better off? I suspect that prospect is what the elites really fear the most.

    • Nicko says:

      The Swiss manage $2 trillion in offshore assets, of course they’re doing fine. …well most of them anyway.

      • VarAway says:

        We are talking about the Swiss PEOPLE (not banksters )
        , Nicko.
        You know the average normal working people.
        They are doing much better alone ( not in the EU ),
        than their counterparts in the UK.
        The UK is not London City.
        Have a good look when you travel the UK countryside.
        How are they living? All those ” charming ” damp cottages, no decent insulation, single pane windows,
        outdated gas fireplaces…..THOSE people were voting
        for a Brexit. They are sick and tired to bail out the Greeks,
        Spanish, Portuguese and very soon the Italian Banks with
        another ECB cash injection of € 360 Billion.
        Go figure!

        • DD Manchester says:

          That has been UK life before the EU. The fact that labor in the UK does not appear as mobile is an internal condition. Losing access to the EU wont help the cottage dwellers who insist on staying put at all. Sometimes you have to go with the flow and make a life for yourself.

          Leaving the EU has accomplished zero but is now ringing up a very high price tag in its wake

  5. Agnes says:

    It is the disappearance of credit that will cause consumers the most pain as you pointed out in your discussion of liquidity and credit Wolf. How about some nice credit cards at only 8%? I bet that would encourage the economy nicely.

    • Alistair says:

      It would encourage more consumer debt, which is the last thing that is needed. Encouraging consumers to carry more and higher credit card balances is a destructive policy by any measure. A short term boost to consumption, sure, but at what long term cost? We already have an economy too dependent on consumer borrowing – borrowing that cannot continue indefinitely.

      Germany is by far the strongest economy in the EU, and they don’t carry credit card balances there. At all.

    • Petunia says:

      I just threw out an entire stack of credit card offers. At 25-29.99% I can’t afford the credit. Thanks Senator Warren for all that consumer protection.

    • wratfink says:

      I keep seeing and hearing about credit cards in the mid 20’s apr.

      Don’t they have lower rates available? My Visa has a 7.25% apr and I’ve had it for well over 10 years with no change in interest rates and no yearly fees.

      In fact, my old Visa’s rate was going up to 12% at the time so I got on the interwebs and found one with lower rates and cancelled the old one.

  6. John Capri says:

    Britain has been living above it’s income for years, with a large number of consumers up to their necks in debt. The property market has been in a bubble for the last few years, supported by numerous government initiatives.

    Brexit. in the long term, should save the UK economy – whist there are some industries still left to be saved. The fall in Sterling should be viewed as good news and should eventually help Britain resolve it’s balance of payments dilemma, as manufacturing exports increase and overwhelming reliance on the service sector gradually reduces.


  7. Leave is a joke on all of us says:

    Oh my lol. The largest leave lie exposed here – Immigration.

    Brexit – The epitome of the fickel mob producing bad, really bad economic decisions. The rats who started this have left the ship and done damage that was simply not needed.

    • nick kelly says:

      The public in the UK was moaning about immigrants before the EU existed.
      They have little objection to the Poles, because they are white, and I suspect many returned to Poland ( they sure left Ireland in a hurry in 2008- and left their newly purchased but unpaid for cars at the airport)
      Most of the resentment was directed at non-white immigrants, ‘Pakis’ etc. and was a legacy of empire, nothing to do with the EU.
      It is a characteristic of resentment that the target need not be the cause of it- it just has to be handy and vulnerable.
      The overwhelming cause of resentment in pre-WWII Germany was the loss of WWI, followed by the Depression and unemployment.
      The target was the Jews, who hadn’t caused either.

  8. frederick says:

    Did İ read that correctly Agnes? Only 8% youve got to be joking right? How on earth is that a solution to anything The people who run up CC debt will default regardless of the rate as the global depression gets going in earnest VERY bad idea

    • Petunia says:

      A lower credit rate allows people to lower payments by transferring credit to lower rate cards. This actually lowers default rates. But you are correct that when your income dries up, the rate doesn’t matter.

    • Agnes says:

      Frederick, it was tongue-in-cheek(except for those people Petunia mentions who have the discipline to lower their usage). My excuse for saying it tho, was that the BoE wants its member banks to lend money—and that string is limp and ‘raveled—so…presto! credit cards. Worse than heroin of course.

  9. Uncle Frank says:

    The Bank of England will probably cut interest rates in the false hope it will stem the bloodshed. The FTSE 100 will get a boost but since when have the markets been a true representation of anything?

    • tomR says:

      that will help £ won’t it? The Dynamic is really an old fashioned £ crisis leading to markedl;y higher interest rates. Im sure the LEAVE campaign highlighted this

  10. Meme Imfurst says:

    “We expect a sharp contraction in investment ” indeed….the same is true for the whole world and has been such for sometime. Crystal ball readings are cheap. The headlines everyday on this Site, Zero, and most other repeatedly point out NO INVESTMENT sharp or otherwise. I spoke with a friend with a major semi manufacturer yesterday and he was saying 25% workforce let go in 5 months and has not seen one dime of new investment in a year. It is not simply Brexit.

    “All the while, EU Leaders have displayed what is, for them, remarkable unity….” Who? Everything I have read indicated the opposite…back and forth threats between Italy, Spain, Portugal, even the Baltics. Even France cutting deals right now in the UK to continue business as usual. I see no unity, two or three in agreement is not unity and this has been the case since Greece. Brexit is an excuse.

    “Our analysis suggests that in the immediate aftermath of the referendum, sectors like travel, fashion and lifestyle, home, living, DIY, and grocery are particularly vulnerable to consumers cutting back their discretionary spending.” “Expert” analysis on ordinary cyclical buying. I don’t buy when something is not in season. DIY…what, like building your own car? As for real estate, every site has yelled that prices are overvalued and have been for over 3 years and now the sky is falling because prices haven’t gone up another 10% this month…..PLEASE!

    The Pound has fallen because of speculators…for the hard of hearing, let me repeat that… BECAUSE OF SPECULATORS. Nothing whatever has changed in two weeks to cause the Pound to drop except speculators. And, that may well influence the mood, but that will pass.
    How is it going George? How’d all those speculative bets go? Selling the Pound to keep your losses lower? You alone can move the market, right?

    • nick kelly says:

      For a speculator to make money he would have to be short the pound BEFORE the vote result. But the financial world in the UK was as shocked as Ladbrooks betting shops ( who made money although offering big odds against Brexit, because most of the bets were against Brexit)
      The financial sector in the UK, i.e., which includes speculators has taken a tremendous hit re: Brexit- including of course anyone holding large pound balances.
      Or did you think the UK financial sector had exited the pound, leaving it to the folk?

      And actually quite a few things have changed in the last two weeks. The PM is resigning, as are all the leaders of the Brexit parties. At the moment the UK is effectively without a government. Negotiate new trade deals? ( sorry, but they have to exist)
      Negotiate with who?

      But of course nothing will change the overwhelming consensus here that everything is due the machinations of the few against good common folk- a VERY familiar story at least 500 years old.

      • Intosh says:

        Are you implying that speculators always make money? Don’t speculator sometimes have to cut their losses too? There are speculators on both ends of the play.

        • nick kelly says:

          I’m saying the opposite. This was not a speculator driven event.
          When George Soros famously broke the Bank of England, that WAS a speculator driven event- occurring over a period of weeks.
          The UK was committed to the ERM- the European Rate Mechanism , keeping the pound at a certain level.

          Soros did the math and decided the BOE wouldn’t be able to maintain the peg. So whenever the BOE bought pounds to support it, he and his group would do the opposite.
          Finally after Soros and group had wagered billions, the BOE capitulated and devalued the pound- making Soros a billionaire.
          These people talking about speculators have no idea what they are talking about. It’s just a buzz word, a mantra from a secular religion in which finance is demonic.
          The Brexit pound wasn’t driven down like many currencies before it (like the Thai Baht in Asian Financial Crisis) it gapped down.
          It had its biggest ever one day drop, it basically opened 10 % below the day’s previous close.
          Far from being a predicted event like Soros’s, it was completely unexpected by, let’s say, the speculator community.
          It is a perfect irony, I’ll give it that.
          The UK version of Joe six- pack decides he’s fed up with Britain being a center of world finance, including most trading in euro bonds etc.
          So he votes to lose all that- he succeeds, then he blames the financial community for the sell off in financial assets, including the pound.
          BTW; the UK financial services industry employs 750, 000 people and London pays 70% of all UK taxes.
          As I’ve often argued here, I like Germany’s economy a lot more (10 % manufacturing versus UK 5%) but although it’s fashionable to denigrate Fintech, we all depend on it to some extent.
          Example: here in Canada we’ve just had our most expensive natural disaster. The Alberta fires will cost 3.8 billion. All that stands between personal disaster is insurance, but in this case re-insurance will come into play. This is the insurance the smaller insurance company takes out. It wouldn’t surprise me if the re-insurance trail leads back through London. maybe Lloyds.

        • nick kelly says:

          Correction- London pays 30 % of all UK taxes, not 70.
          Also the pound did gap viciously down, in response to the news the entire 10 % would not have happened at once.

  11. Kreditanstalt says:

    Aren’t you rather parroting the mainstream liberal establishment line? That Brexit, and Brexit only, has destroyed the UK’s economy? And it’s all the fault of the rubes and proles who voted ‘Leave’…?

    The UK has been a debt bug in search of a windscreen for years, if not decades.

    Plus…to believe that everything was going swimmingly before June 23rd requires one to also believe that the economy was strong, that asset prices were reasonable, that living standards less debt were rising and that good jobs were being created prior to the vote.

    Pretty difficult!

    • Alistair says:

      Exactly. If anything, Brexit has just uncovered the fickleness and fragility of the EU – if not the global – economy. Built on a house of cards. As long as nobody sneezed, nothing happened. Well, someone, somewhere, was going to sneeze at some point. Turned out the UK sneezed. Now every financial calamity the world over for the next decade will be blamed on Brexit. It is the perfect scapegoat. It allows the central bankers, politicians and policymakers to completely avoid blame for the gasbag asset bubbles they created. Because of course, markets would never have corrected if not for the knuckledragging mob who voted for Brexit. ‘Toopid uneducated bumpkins ruined everything.

  12. Ptb says:

    There’s no agreement they can’t get back from leaving the tyranny of Brussels.

    In the mean time, I’ve ordered a bunch of products from a very good bike accessories maker in the UK because the price is now very low in USD.

  13. Peter Forsyth says:

    With zero% interest rates and fiddled inflation figures capital is halved in 8 years. Those who print the money simply carry on as normal in a predatory banking environment. The rest fall into a line that’s going backwards for all time unless revolution takes the place of elections and referendums. This is the game plan of the EU and the banking cartels. They are unconcerned about the outcome of their policies knowing full well that only nuclear war might just change things.

  14. Shawn says:

    A plunging pound will act as a stimulus to economic activity. I think it’s a good thing. I think people are really loosing their head. Britain has a far more flexible labor market than the continent and pretty soon they will have control over their immigration policy. This is just some sort term pain that will resolve itself in the due course. Britain will be far more nimble on the world economic stage that a lumbering, bureaucratic Europe whose banking system is about to collapse.

    • tomR says:

      yes it will be great that £ assets fall in value. the benefits of a devalued £ we know are short term and transitory. Go look at the 70’s

  15. wratfink says:

    Do you think that the demise of the North Sea oil industry has something to do with the slowing British economy? Less revenue and more of the economy needed to pay for imported hydrocarbons.

  16. ML says:

    Just had a look at the consumer confidence survey, per the link above. THe biggest falls are in Scotland and Northern Ireland and The Midlands. No big deal.

    Since Scotland voted overwhelmingly to remain, hardly suprising they lack confidence. Northern Ireland is an outpost. The West Midlands is an industrial area whose people are relatively poor to begin with.

    Lumping the results togethet paints an erroneous picture.

    • Wolf Richter says:

      Yes, so you saw that there were also big differences between younger and older, men and women, remainers and leavers, richer and poorer…. but hey, in the end it all averages out because everyone plays a role in the economy.

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