Jessica Fino 25 Apr 2017 10:26am

Rising costs hit UK consumer confidence in Q1

Increasing prices and the weaker pound have driven down consumer confidence and led to an increase in companies posting profit warnings in the first part of 2017

According to Deloitte’s consumer tracker, optimism among UK consumers fell to -7% in Q1, compared to -6% in the last quarter of 2016.

The firm said that rising inflation and nominal wage growth have started to slow recently, which led to consumers starting to feel a squeeze on their disposable income.

Confidence in disposable income fell to -17% and discretionary spending declined to -4%. This was driven by food price increases in February and March, as well as a 4.7% increase in transport costs.

Ian Stewart, chief economist at Deloitte, said, “Since last summer’s EU referendum consumer spending has held up well, but with inflation rising and nominal wage growth starting to slow, consumers are beginning to feel a squeeze on their disposable income.

“In March, the rate of inflation stood at 2.3%, above the Bank of England’s 2% target and the highest in more than two years. There are already some signs that these pressures are contributing to a slowdown in consumer activity.”

However, Stewart said that record levels of employment and low interest rates should help the UK avoid a sharp drop in consumer spending.

A separate report by EY also revealed that UK-quoted companies issued 75 profit warnings in Q1, two more than in the previous quarter.

The report found that the profile of UK profit warnings has changed this year, with a shift from industrial and commodity sectors to support services, travel and leisure, nonlife insurance and software and computer services.

Moreover, 28% of warnings cited rising costs and pressure on prices, while a further 28% cited contract delays or cancellations, which was the highest proportion of warnings in more than five years.

Alan Hudson, EY’s head of restructuring, said, “Improving global growth and the positive impact of a weaker pound on exports, combined with falling expectations in stressed areas, should limit the number of profit warnings in the near-term.

“However, increased overheads, political and regulatory change, and digital disruption are piling pressure on sectors with long-standing structural issues, especially in consumer and business services. Periods of rapid change often leave companies behind and the next few years are unlikely to prove an exception.”

EY said that, over the last 12 months, half of quoted travel companies have issued profit warnings, with 36% of them citing the impact of Brexit or adverse exchange rates as reasons.