Key points from analysis:
- 9.4% year-on-year increase in UK household discretionary spending during Q2 2014 is largest consistent rise since height of pre-crash boom in 2006.
- Discretionary spending rising as a proportion of total household spending and total disposable income.
- Increase in discretionary spending financed by income from property and not from wages and salaries.
This release contains an analysis by Verum Financial Research of quarterly data published by the ONS on household spending. From this data, Verum calculates households' discretionary spending (total spending less essential living costs) to compile the Household Discretionary Spending Tracker.
Growth in discretionary spending
Source: Verum Financial Research
By comparing year-on-year quarterly changes, an analysis of ONS data shows that household discretionary spending grew by 9.4% in Q2 2014 compared with Q2 2013. This represents the largest increase in household discretionary spending since before the financial crisis of 2008.
The data shows a clearly rising trend with household discretionary spending rising consistently year-on-year in the last four quarters. In previous recessions, consistent increases in discretionary spending have helped underpin a sustainable economic recovery.
This will be important at a time when global economic growth is weakening, particularly in the eurozone, which, together with a stronger sterling and weaker Euro, will limit the UK economy's ability to increase income from a higher level of exports.
Discretionary spend rising as % of total spending
Source: Verum Financial Research
Household discretionary spending is rising both as a proportion of total spending and as a proportion of household disposable income. This means that households are spending a lower proportion of total income and total spending on essential living costs including housing, utilities, food, clothing, transport, communications, insurance and interest payments.
Increased spending financed by property income
Source: ONS/Verum Financial Research
Households have been able to finance a higher level of discretionary spending from an increase in disposable income. However, this has not been financed by an increase in wages and salaries from employment, but by an increase in income from property such as the letting of residential and commercial property owned by households and also by a recent sharp increase in income from self-employment.
Income from employment wages and salaries accounts for 61% of total household disposable income and income from property accounts for only 11%, but while wages and salaries have increased by 22% cumulatively since Q4 2006, income from property has grown by 43% in current prices.
Spending also supported by rise in borrowing
Source: Bank of England/Verum Financial Research
An increase in household discretionary spending has also been supported by an increase in net consumer lending excluding mortgage lending. Between Q1 2009 and Q1 2011, households were repaying unsecured borrowing, but from Q2 2011, unsecured borrowing by households began to rise steadily.
But rising savings will slow discretionary spending
Source: ONS/Verum Financial Research
When house prices rise, households tend to reduce the amount of income they save as rising house prices increases household wealth. Consequently the proportion of income saved known as the savings ratio fell between Q2 2012 and Q1 2013 as house prices rose.
But as households began to realise that interest rates could start to rise as the economy recovered, the savings ratio started to rise again in Q4 2013. If households continue to save a higher proportion of income as an insurance policy against higher interest rates, this will reduce the rate of growth in household discretionary spending.
Comment
Robert Macnab, director of research at Verum, which carries out the analysis, said:
"With signs that global economic growth is slowing, particularly in China and the eurozone, a higher level of household discretionary spending will help to cushion the UK economy somewhat from a downturn in global trade, particularly from a reduction in UK exports to the eurozone countries.
"While the UK economy still needs to be rebalanced away from domestic consumption towards an increase in exports of services and manufactured goods, a slowdown in global growth will reduce the rate at which this can be achieved.
"Continued growth in household discretionary spending could be thrown off course by an increase in interest rates or by just the threat of a rise in rates. Any significant rise in interest rates, and more specifically mortgage rates, would cut household discretionary spending as household debt servicing costs rise.
"The areas of household spending that have benefitted from the increase in household discretionary spending have been alcoholic drinks, household appliances, tools and equipment, purchase of motor vehicles, audio-visual equipment, durables for outdoor recreation, gardening, games and toys, sport and camping equipment, restaurants and cafes, accommodation away from home, jewellery, life insurance and financial services."