U.K. Consumers Stay Under Pressure Even as Pay Squeeze Nears End

(Bloomberg) -- The year-long squeeze on living standards may be coming to an end, but U.K. consumers may not be out of the woods just yet.

Workers are enjoying the strongest wage growth in almost three years, while the sharp price increases of 2016 that ate into incomes are fading, leaving workers with more cash in their pockets.

However, that’s unlikely to spark any kind of splurge or bring immediate cheer to retailers. While consumers helped drive the economy to a better-than-expected performance last year, spending was still the weakest in six years. Even that sluggish growth was only possible because households saved less and borrowed more, raising questions about sustainability -- especially with more interest-rate increases on the horizon.

“The return to positive real wage growth is unlikely to translate into materially stronger spending in the near term with consumers expected to remain under pressure from uncomfortably high debt levels, particularly if interest rates rise further,” said Suren Thiru, head of economics at the British Chambers of Commerce.

Read more: Millions of Britons in debt face more pain from rate hikes

It may take some time for consumers to find their feet after being drained by meager wage gains and faster inflation in the wake of the Brexit vote. And that’s just part of the story: According to Bank of England Governor Mark Carney, workers have seen a decade of lost wage growth and pay increases are set to remain far below their pre-crisis rates of about 4 percent a year.

“While it’s good news the official squeeze on living standards may be coming to an end, it still leaves the majority of our clients in financial difficulty,” said Matt Barlow, chief executive officer of debt charity Christians Against Poverty.

Retailers reported a unhealthy Christmas period, while data from Visa this week showed households are continuing to curb their spending in 2018. Suit seller Moss Bros Group Plc and department store chain John Lewis Partnership Plc both warned just last month that it will be a challenging year.

“Britain has a lot of ground to make up after an awful decade of pay squeezes, stagnation and all too fleeting recoveries,” said Stephen Clarke, senior economic analyst at the Resolution Foundation. “On average, people are still taking home less than they did before the crisis.”

©2018 Bloomberg L.P.