There’s lots of resilience in the UK economy and “reasons to be reasonably positive”, according to the Annual Hotel Conference’s (AHC) economist keynote.
James Pomeroy, global economist at HSBC, speaking at the annual conference in Manchester today (11 September), highlighted that the negative economic stories are concentrated in the manufacturing side of the economy.
“[Consumers] are cutting back on goods, those numbers don’t include services,” he said, arguing that the service sector is in fact looking “reasonably healthy”.
“Anything recreational is doing really, really well,” he said, pointing out that ‘cost of living crisis’ is not hitting all consumers equally.
“Low-income households spend a massively disproportionate amount of their money on the essentials... 45 per cent of their spending goes on food, rent... and utilities. The cost of all of those things is what is at the heart of the cost of living squeeze. If that’s the core of your spending, that’s really going to hurt.”
Meanwhile, higher income households have been less affected, he said, because those big increases are a smaller percentage of their outlay. These households also saved a lot of money during the pandemic – and are still, on average, saving more, as a result of interest rates.
“They’re giving the people who are able to spend, who are spending, even more money to go and spend,” said Pomeroy. “Higher income households are doing as well today as they probably ever have.”
When it comes to workforce, hospitality vacancies in the UK fell to 124,000 between May and July, down by 47,000 compared to the same time last year, one of the largest falls according to the Office for National Statistics.
Although there have been reports the government is looking at a short-term visa scheme for under-30s from a countries such as Taiwan, Norway and South Korea, the Home Office also announced earlier this summer plans to increase the immigration health surcharge and the application fee for skilled worker visas.
As a result of workforce shortages, wage growth has hit businesses with the UK running at about 7 per cent wage growth. Pomeroy compared the situation to the US, where people have started coming back into the workforce due to the increase in wages – but we aren’t there yet in the UK, he said.
“Because that number is still going up in the UK... wages are probably going to keep rising... for the time being,” he said.
However, he added: “The good news about strong wage growth is this helps to keep people spending... if you feel like you’re not going to lose your job and your wages are rising, and are now rising more quickly than inflation, you’re more likely to spend it.”
Wage costs continue to pose a problem for businesses, “but it’s also what’s probably played a massive role in keeping us out of recession”, he pointed out.
Despite the prospect of continued wage growth, Pomeroy also highlighted that energy prices had fallen since last year, which businesses will eventually see although “it will take somne time to filter through to the prices everyone’s paying”. Wholesale food prices are down 25%-30% in some places compared to last year, although some prices may stop falling as a result of things like the Russian grain deal and India’s rice export ban. Shipping costs have also fallen, he said.
“We’ve got a lot of good news – costs are falling... but how long does it take for all of that to filter through the supply chain?”
Pomeroy said he was “reasonably confident” a UK recession was not in the cards, although warned of the “huge risk” of interest rates, which are expected to hit mortgages, businesses looking to renegotiate loans and UK government spending.
A lot of households are going to have to renew their mortgages in the coming years before interest rates start falling, something that is not expected to happen until 2025, which is expected to affect mortgages to the tune of an estimated £300-£500 a month in additional interest.
“That means a huge hit on disposable income. We don’t know whether those households getting hit will mean reduced spending,” said Pomeroy.
In fact, rates are potentially going to go up once more, he said, with an update expected later this month. Bank of England governor Andrew Bailey has said he expects inflation to fall this year, backed by signals from economic indicators such as the consumer prices index (CPI), which dropped to 6.8% in July. However, the central bank’s monetary policy committee (MPC) is expected to increase interest rates by 0.25 percentage points to 5.5% later this month.
“The robustness of discretionary spending, we think, will continue for an extended period of time,” concluded Pomeroy.