Some things are so out of character that they really do make you wonder what is going on. For decades, one persistent criticism of the UK economy was that it was too reliant on consumer spending. Add \u201cdebt fuelled\u201d to the description and you were well on the way to completing the UK economy bingo card.<\/p>\n
Things have changed, and quite dramatically. Warm off the press are the latest monthly gross domestic product (GDP) figures, which showed a 0.1 per cent increase in August and a 0.3 per cent rise in the June-August period, compared to the previous three months.<\/p>\n
The Office for National Statistics noted that while overall service-sector output grew by 0.4 per cent in the three months to August, that of consumer-facing services fell by 0.6 per cent, which is quite a contrast.<\/p>\n
\u2022 UK economy grew 0.3% in three months to August<\/a><\/p>\n It is also a bit of a mystery. Many people say to me that they see a lot of conspicuous consumption around \u2014 a lot of splashing the cash or cards \u2014 with restaurants and bars full and some people spending as if there were no tomorrow. Away from that, though, there is a silent majority who are much more cautious, often because they have to be.<\/p>\n As a result, consumers are no longer driving the economy. Compared to the pre-pandemic final quarter of 2019, consumer spending adjusted for inflation in the second quarter of this year was up by a mere 0.7 per cent, lagging well behind the 5.1 per cent increase in real GDP over that period.<\/p>\n Even worse has been the recent record. Consumer spending over the past three years, comparing the second quarters of 2022 and 2025, is down by 0.1 per cent. Stagnant, in other words.<\/p>\n Nor is the \u201cdebt fuelled\u201d label appropriate any more. Debt peaked at 155.8 per cent of household disposable income as long ago as the third quarter of 2008, when the financial crisis was unfolding. In the second quarter of this year, it was down to 117.1 per cent.<\/p>\n The reluctance of UK consumers to spend is attracting the attention of the great and good.<\/p>\n Mohamed El-Erian, former chief economist at the International Monetary Fund and chief executive of fund manager Pimco \u2014 and until recently, president of Queens\u2019 College, Cambridge \u2014 tweeted a report showing that UK consumer spending in recent years has been the weakest in the G7 (America, Japan, Germany, France, the UK, Italy and Canada). Adjusted for population growth, spending per capita is below pre-pandemic levels, uniquely among G7 countries.<\/p>\n Catherine Mann, an often \u201chawkish\u201d member of the Bank of England\u2019s monetary policy committee (MPC), devoted a speech to it recently at the Resolution Foundation think tank: \u201cExplaining the Consumption Gap\u201d. The picture, she said, was \u201csobering\u201d. Consumer spending in aggregate was well below its pre-Covid trend and the saving ratio has risen to a high of 12 per cent in recent quarters.<\/p>\n Mann offered a long and detailed analysis, which mainly boiled down to inflation \u201cscarring\u201d being a significant factor holding back consumer spending.<\/p>\n \u201cThe legacy of the inflation surge and price attentiveness continue to weigh on consumption and saving decisions, with a higher saving ratio via precautionary motives being one explanation for the consumption gap,\u201d she said. \u201cFurther, high inflation is associated with more volatile inflation, which makes consumption-savings decisions by households more difficult. The research shows that households who are more uncertain about future inflation become more uncertain about their future incomes, which reduces their expected consumption.\u201d<\/p>\n \u2022 Consumers \u2018scarred\u2019 by persistent inflation, says Catherine Mann<\/a><\/p>\n Put more simply, the recent behaviour of UK consumers is a pretty good advertisement for the importance of low and stable inflation. If people (and businesses) spend their time responding to price rises and anticipating further increases, they will hold back. <\/p>\n Mann, who started her career at America\u2019s Federal Reserve Board, summed this up by quoting her former boss, Alan Greenspan. As he put it: \u201cWe will be at price stability when households and businesses need not factor expectations of changes in the average level of prices into their decisions.\u201d <\/p>\n High and volatile inflation is one reason why UK consumers are inclined to spend less and save more. There are, I think, three other reasons.<\/p>\n