Guest Post from Suzanne Jones, The Trends Observatory
Economics is a vast and complex subject. There is a wide range of economic measures used in relation to the UK economy and there are millions of column inches written about the topic – all of which can create a confusing landscape for non-economists.
Although I worked for one of the top financial services companies for over a decade and prepared regular consumer economics reports, I’m not an economist. During the time I spent looking at economics from a consumer’s point of view, I found that there are three key measures that tend to influence economic activity more than others:
- interest rates;
- the difference between wage growth and inflation;
- and consumer confidence.
If you’re producing insight about any consumer retail product (or indeed any industry that supports the consumer retail business), it’s worth monitoring and reporting these three measures, as they’ll influence consumer spending - and therefore sales.
1). Interest rates
These have an important function in the economy. The base rate is set by the Bank of England as a lever to control inflation rates (at least, that’s the theory!). When the Bank changes its rates, commercial rates will often change by a similar amount. We’re currently in a period of extraordinarily low interest rates which have been in place since 2009, when the global recession hit the UK.
Low interest rates have a number of benefits:
- Low cost of borrowing. Interest payments on credit cards and loans are cheap, which can encourage consumers to borrow or spend on credit cards.
- Low mortgage rates. The cost of mortgages is lower, giving consumers more disposable income.
- Increase in consumer confidence. Low interest rates have an effect on confidence, as consumers tend to be more likely to take financial risks in low inflationary periods.
However, it’s not such good news for banks or savers. Banks won’t be able to charge much on interest rates and will be unable to give much back to consumers who are saving. This has reduced economic activity since the start of the low interest period (e.g. fewer people are seeing the value of saving). It’s especially hard for pensioners, who depend on the interest from their savings as part of their income.
2). Inflation versus wage growth
The difference between wage growth and inflation is arguably the most important measure for any company involved in consumer retail. The degree of positive difference determines how ‘well off’ we feel. When wage growth is above inflation, consumers feel that they are becoming better off, as price rises aren’t exceeding their earnings. However, when this is reversed, consumers start to notice prices at the till getting steeper and this triggers money-saving behaviour and increased price consciousness.
The chart below shows that the UK has been on the bad side of this equation for some time and has only recently moved back to a positive difference. This is good news for the economy, as consumers who feel better off will be more likely to increase their spending and this will also keep price consciousness at a reasonable level. Although consumers will continue to want value for money, they’re likely to be less persistent about getting the lowest price they can.
3). Consumer confidence
In most economies, consumer spending can range anywhere from 50 to 75% of GDP, which is clearly very important in keeping an economy ticking over. As long as the right economic measures are positive (e.g. interest rates and wage growth), the remaining key factor is confidence. Consumer confidence measures optimism about the economy and is a good lead indicator about consumer spending for the next three to six months. If you’re launching a new product as confidence takes a nose-dive, this is likely to affect product sales, particularly if the product could be considered as a luxury.
Some say that lack of confidence in an economy can actually drive it into decline, so that it becomes a self-fulfilling prophesy. It certainly has an effect on consumers’ willingness to spend.
So, if you’re producing insight about a potential new product development, then it’s also worth providing some insight about how consumers are spending and how they feel about the economy at that point in time. You might have anticipated consumer needs very accurately – however, if the UK consumer isn’t in the mood to spend, the product might not achieve its aims.