Unpicking the consumer spending puzzle
Making sense of the latest trends in property and economics from around the globe.
4 minutes to read
Sentiment and spending
Consumers are the most pessimistic they've been since the depths of the pandemic or by some surveys even earlier, so why is spending holding up?
Analysts on both sides of the Atlantic had trouble answering that question last week. Retail sales excluding cars and fuel surprised on the upside in the US, despite consumer confidence at lows not seen since February 2021. The UK's headline figures also rose on both a monthly and annual basis, despite confidence at its lowest ebb since the mid-70s.
The reality - when you consider comments from the major US retailers during earnings calls last week, or research from McKinsey or our own Stephen Springham - suggests that the headline figures mask an increasingly complex picture. The fortunes of various goods vary significantly, as does the spending of various consumers. Inflationary pressures are concentrated mostly in lower income households that must spend more on energy and food in relative terms, for example.
Unemployment remains remarkably low in both markets and consumers are demonstrating a willingness to maintain spending via excess savings amassed during the pandemic, amounting to some $4 trillion in the US and about £180 billion in the UK. A slowdown undoubtedly beckons through the Autumn and winter as interest rates rise and fuel bills spike in the UK, but the extent of that slowdown looks much more uncertain than the sentiment surveys would have you believe.
Regional office markets
Office take-up across major UK cities hit 2.5 million square feet during the first six months of the year, up 18% on the same period last year and within 7% of the ten year average for the period, according to our UK Cities Mid-Year Review from David Porter.
As we're seeing in London, demand is concentrated on new and high quality space, particularly buildings offering ESG-led amenities with high sustainability ratings. While the vacancy rate climbed to 8.3%, from 7.2% a year earlier, the availability of new and Grade A space contracted slightly. That supported rental growth of 3.3% over the period.
The supply and demand narrative arguably supports the case for speculative development, though the current climate poses difficult questions for viability, according to David's analysis. Materials costs have climbed by a fifth over the course of the past year, so developers increasingly want to see consistent evidence of prime rental growth before bringing projects forward.
The arrival of overseas capital to the market pushed Q2 investment volumes to £930 million, the highest quarterly total for three years. The scarcity of prime assets is likely to keep pressure on prime yields despite the economic headwinds, however the rising cost of debt is likely to see some buyers opt for a more cautious approach as the year progresses.
Building materials
Strike action at the UK’s biggest container port Felixstowe will further disrupt the distribution of construction materials over the coming weeks, adding to cost pressures. Felixstowe handled nearly 18 million tonnes of goods last year, amounting to more than a third of total goods passing through UK ports.
“Whether finished goods or raw materials, anything already en route to those ports may have to be redirected, perhaps around the UK, but even to the EU. That means bottlenecks, delays and increased costs. The knock-on effects could easily last weeks," Construction Products Association deputy chief executive Jeff May tells Construction News.
The disruption is likely to delay any easing of construction cost pressures, and there have been several signs that the rate of growth is slowing in recent weeks. Purchase price inflation in July's S&P Global / CIPS UK Construction PMI eased considerably during July, with cost burdens the least marked since March 2021. Construction firms had noted upward pressure on business expenses from higher energy, fuel and transport costs, but that was partly offset by some easing in commodity prices (especially for metals and timber).
China property
Chinese authorities have again stepped in to alleviate a worsening property slump.
Banks have lowered benchmark lending rates and authorities are offering additional loans. The five-year loan prime rate, a reference for mortgages, was reduced by 15 basis points to 4.3% after being cut by the same magnitude in May, according to Bloomberg.
Back in June we looked at research from the Bank for International Settlements charting the growing importance of the residential sector on China's economy. Residential investment increased steadily through the first decade of the 2000s and now accounts for about 10% of GDP, far higher than other major economies.
From 2010 onwards, a "significant link" emerged between housing market activity, such as construction starts measured by total floorspace, and economic output. That link is now so strong that the prevailing housing slowdown is likely to have had a material effect on China's growth over the past year. Had floor space starts and residential investment remained at 2018-2019 levels, year-on-year GDP growth would have been 1% - 1.5% higher in 2021, according to the BIS estimates.
In other news...
Investors warn of ‘disconnect’ as markets price in early Fed rate cut (FT), and finally, ‘pandemic retirees’ return to work as inflation hits the value of pensions (Times).