Resilient consumer confidence helped boost U.K. retailers this week, but problems lie ahead warns UBS.
In a report published today, the UBS Evidence Lab team argues that U.K. consumer confidence was robust following the shock of the EU referendum result earlier in 2016. This is reflected in the positive third quarter trade data from U.K. retailers this week.
Marks & Spencer announced better than expected sales performance in the third quarter, while Tesco reported underlying sales rose 0.7 percent over Christmas. Two other U.K. food retailers, Sainsbury and Morrison, also reported sales growth.
The Evidence Lab conducted a survey of U.K. consumers in September and found evidence of confidence and optimism among consumers
"When the UBS Evidence Lab Survey was conducted in September 2016, respondents had clearly recovered from any initial concerns over the consequences of the EU Referendum vote," the UBS team said in the research report.
"There was a calm and balanced outlook for the housing market, and for expectations of changes in personal financial circumstances."
However, there is evidence that the recent confidence may be debt-fueled. Bank of England data released last week indicated personal debt grew by 10.8 percent in the 12 months to November, totaling £192.2 billion ($234.85 billion). Of this, credit card debt made up £66.7 billion.
Further, the UBS team now believes that consumer optimism was misplaced and will not last through 2017.
"Inflation is set to accelerate over the coming months, and when it does, the squeeze on disposable income will not be alleviated, in our view, by offsetting strength in wages. A historically low savings ratio and elevated personal debt levels mean alternative ways of replacing lost spending power are also set to be absent."
The team warns as a result that confidence and spending will take a hit, which would be a negative outcome for the economy.