BBusiness has been better than expected this year for Paul Askew’s fine dining restaurant in central Liverpool. He feared for his future amid the worst cost of living crisis in a generation, but so far the bettors have kept coming.
“January is usually the quietest month,” says the head chef at the Art School restaurant, where menus start at £39 per person. “But people felt liberated and came out in large numbers. The start of the year was better than we could have hoped for, and it continued.
Faced with the biggest hit to household incomes since modern records began in the 1950s, businesses across the UK are bracing for a slowdown in consumer spending as the price of everything from gas and oil electricity to food and clothing, soars.
But experts say a two-tier consumer economy could emerge, with wealthier households, who saved record sums during lockdown, continuing to spend. The signs are there: in addition to the restaurant rush, there was an airport rush over Easter and the housing market is booming. And all this despite the worst inflation since at least 1992 and amid reports of growing food bank use and rising fuel poverty.
For Askew, bookings for May and June have slowed and he fears tight budgets could keep diners away. Its costs are also rising: the prices of beef and lamb have risen by more than a quarter, which could force it to increase menu prices.
“I think when people see direct debits, energy bills, and weekly purchases go up, they’ll start to cut back,” he says. “It’s a worry.”
His hope is that a glut of lockdown savings and a desire to spend on experiences rather than physical goods after two years of life on hold will entice diners to come.
“We may be insulated by the furlough effect, which has given some people more money in their pocket. It can help for three to six months. But it’s how long it lasts because that’s the big question.
So far, the picture is mixed. Consumer confidence slumped in April to its second lowest level in nearly 50 years, as energy prices and tax hikes added inflationary pressure. Retail sales fell more than expected in March as soaring food and fuel prices forced shoppers to tighten their belts. Some economists are warning that a summer recession could be on the cards.
Part of the retail slump was due to consumers turning to spending on services after restrictions ended. Supermarkets have benefited from the lockdown but now face fierce competition as pubs, restaurants and travel rebound.
Retail sales account for about a third of overall consumer spending. Barclaycard’s credit and debit card figures showed other forms of spending surging over the Easter weekend as Britons enjoyed days in the sun. Restaurant sales were up 116% on Easter 2021 and more than a third on 2019. Pubs, bars and nightclubs saw a 74% jump on pre-Covid levels.
Some economists think saving helps. According to the Bank of England, more than £200billion was salted during the lockdown, but that was concentrated in the wealthiest 40% of households and in professions where working from home was possible. The poorest households have lost money during the pandemic and are also expected to see their incomes hit the hardest.
“Less well-off households will be disproportionately affected as more of their income is spent on food and energy,” said Richard Lim of consultancy Retail Economics. “It’s a very uneven picture.”
Figures from accountant Deloitte confirm this. They show that 5% of households with an income of £10,000 or less were able to save in the first three months of this year, compared to 38% of households with an overall income of £100,000.
While the economy could be helped by savings spending, analysts say it will still be under severe pressure and could be close to stagnation as many people tighten their belts. Headwinds ahead include higher interest rates and a further increase in gas and electric bill caps this fall.
“Consumer confidence is flashing a big red warning sign,” said Robert Wood of Bank of America. “Normally, you don’t get such low confidence without consumers reducing their consumption. And if they are, we could be pretty close to recession. Real incomes are hit hard.
Contrary to some analysts, the US investment bank does not predict a recession as it expects business investment to rebound and some households to dip into savings while others increase borrowing. But consumers make up two-thirds of the UK economy, so the stakes are high.
“If the consumer stops growing, the economy usually stops growing,” Wood added. “That’s the biggest worry this year.”