I do not wish to be a party pooper, as the latest economic news out of the United Kingdom is positive, but stagnant U.K. wages still threaten to spoil celebrations, especially for sectors such as hotels that have a direct relationship between revenue and discretionary income.
Recent jubilation (actually, this being the U.K., it was more a case of a pat on the back) was due to a noticeable benchmark in the health of the U.K.’s gross domestic product.
The British government’s statistician, the Office of National Statistics, stated that the economy is now officially 0.2% larger than it was at its former peak just before the recession in 2008 that cast all aside in its well-chronicled rampage.
Caution should be shown before the dancing begins, however. Threefold are the concerns of U.K. hoteliers, I believe:
- Wages: Unemployment is down, but some worry that many of those jobs are part-time or zero-hour contracts, and wages are far from rocketing. A July report from the Centre for Economics and Business Research stated that U.K. discretionary income had risen by only £1 ($1.69) per week in the year since June 2013.
- Interest rates: The U.K. has had interest rates at the low (business-promoting?) rate of 0.5% since March 2009. The Bank of England, which sets the rate, has hinted an increase is likely, with the end of 2014 often being mentioned, although for political reasons perhaps that might not happen until the second half of 2015.
- Growing, aging population: The U.K. population grew by 2.7 million between 2008 and this year. So, on a per-capita basis compared with 2008, the economy might be considered, as the Wall Street Journal calculated, “still some way below its pre-crisis level.”
My takeaway from this is that, yes, U.K. business is doing better, but its success needs to keep in step with at least a sizable percentage of U.K. consumers.
Business does appear healthier. Legal firm Blandy & Blandy posted following the ONS announcement that the number of U.K. businesses entering administration had dropped.
The post added, though, that the same held true for individuals declaring bankruptcy but that there had been an increase in individuals entering Individual Voluntary Arrangement schemes, where bankruptcy can be avoided by agreeing to a debt repayment strategy.
Creeping pay packages, growing population, rising IVA numbers and the worrying scenario of interest rate increases all point to a dip in discretionary income.
Taking a two-week vacation is considered an annual right in the U.K., but smaller wallets will likely push vacationers to cheaper package holidays on the European mainland. The pound sterling is strong, too, so exchange rates are favorable to Brits.
Election elephant
The most likely reason interest rates might not rise before the second half of 2015 is that the U.K. is to have a general election in that year, and politicians—as they would act anywhere—are not hurrying to rock the boat, or voters, especially as all signs point to there being again the likelihood of a coalition government. Coalitions are not usual for the U.K., which before the 2010 election had not had such a government since 1922.
Politicians and central bankers will also not be keen to increase interest rates while wages remain muted, especially as inflation is bouncing around at the 1% to 2% mark—historically levels not of huge concern to politicians but again of significance when wages do not keep track.
If wages stay depressed and interest rates rise, discretionary income will fall.
Research and policy organization The Resolution Foundation said if interest rates rise to 3% by 2018, 1.1 million U.K. households will spend more than one-third of their after-tax income on debt repayments, what it referred to as being in “debt peril.”
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