Can better living standards be turned into improved supplier profitability?

April 11, 2018 4:29 pm
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The language has been, as is often the case these days, a bit over the top. However, whilst there has not been a crash in real British living standards over the last few years there has been a bit of a squeeze. In CY2017 we saw wages and salaries rise by between 2.5-3.0% whilst inflation, as measured by the ONS CPIH was hovering for much of the time over 3.0%.

Similarly, whilst not a crash, we are measured about any suggestion of a forthcoming surge in living standards for UK households as we see wages and salaries more or less matching CPIH as the second quarter of CY2018 commences with the prospect of a more positive gap to come. So, as the annualisation of sterling’s devaluation against the global currencies works through the system, post the UK-EU Referendum, plus as sterling actually appreciates, it has gone from USD1.20 to 1.40+ versus £1…, then we foresee an easing of UK inflation.

Correspondingly, we also believe that the labour market will remain quite tight, especially for skilled workers. Also, it feels like the freeze on public sector pay will thaw, easing any prevailing people flow to the private sector and supporting market values, leading to an expectation that wages & salaries in the UK in CY2018 will rise above prices. So, we foresee rising living standards, but moderately so, to be clear.

In CY2017 we saw wages and salaries rise by between 2.5-3.0% whilst inflation, as measured by the ONS CPIH was hovering for much of the time over 3.0%.

What does this mean for consumer expenditure in these Isles? Well, those squeezed households have been spending more of their hard earned cash on essentials rather than discretionary items in recent times – so food, utilities and fuel. Accordingly, with a little bit more slack in the system that trend is likely to ease back a little with more treating taking place.

What folks spend their money on though is shifting, with less seemingly going on things (goods) over experiences (services). We think this will continue, which will help leisure and entertainment over retail; shopkeepers are also contenting with online shift.

Will the anticipated upturn mean better times for manufacturers and business services providers? Well, there may be a trickle of rising living standards, which are a whole lot better to face than the falling ones. At the same though there is the prospect of two increases (circa 50 basis points) of interest rate accretion to come in CY2018, whilst there are plenty of cost pressures facing business.

We have touched upon labour prices already, which are expected to grow. Additionally, there is the burden of a National Living Wage creeping higher, the Apprentice Levy and the now expanded Auto-enrolment charge. Energy prices are up year-on-year as Brent Crude ICE now normalises at USD65-70/barrel rather than USD45-50, whilst rents and particularly business rates rarely tend to fall; especially for companies in the South and East of England.

As such we see structural cost pressures that are likely to lead businesses to think evermore closely about unit costs, productivity if you will, and the drivers of that including more automation, more customer insight to drive better decision-making and more agility.

What folks spend their money on though is shifting, with less seemingly going on things (goods) over experiences (services). We think this will continue, which will help leisure and entertainment over retail; shopkeepers are also contenting with online shift.

Whilst this characterisation of the UK consumer economy is high level, and cautiously optimistic, so implying opportunity, we also at a high level see cost challenge that needs to be countered, particularly if we throw import substitution and export opportunities into the mix too.

Coriolis is a business that is centred on operational efficiency at the sharp end, not the high level, from well-grounded folks that understand the importance of productivity in the evolving UK economy. In this respect, benchmarking, understanding scope to automate versus manual processes and attentively focusing upon managing costs down, is what Coriolis does; its raison is highly relevant to a dynamic UK economy.

I hope the prospect of a rising tide of consumer disposable income, even if gradual, works to your favour over the coming year.., let’s hope that there are no more snap elections and the like to b*gger things up again…

Dr Clive Black
Advisor to Coriolis