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Verum analysis of UK household spending on motor fuelsBack

VerumLogoIs the recent increased spending on petrol and diesel a sign of sustainable economic recovery?

Key points

Consumer spending on motor fuels mirrored changes in the average fuel price from 2007 until Q2 2014.

During Q1-Q3 2014, pump prices fell by almost 6% while household spending on fuel increased by nearly 11%.

This release contains an analysis by Verum Financial Research of quarterly data published by the ONS on UK household spending. The most recent data covers the period ending 30 September 2014.

Household spending on fuel v average fuel price

Verum_fuel_graph1

The latest Verum Household Discretionary Spending Tracker, calculated by subtracting essential living costs from total household spending, revealed an 8.7% year-on-year increase in UK household discretionary spending during Q3 2014.

While spending increased on a wide range of products (cars, air travel, hotels, restaurants, alcoholic drinks, major household appliances and cinema and outdoor entertainment), Verum suggests that the most significant trend was the increased spending on petrol and diesel.

Between July 2008, when a barrel of Brent crude reached a peak spot price of $144, and the first quarter of 2014, UK household spending on motor fuel mirrored changes in the price of fuel. Despite changes in price, the volume of fuel that households bought remained virtually unchanged. Hence, when pump prices rose, spending on motor fuel rose. When pump prices fell, spending on motor fuel fell.

This relationship appeared to change in Q2 2014. Pump prices fell by less than 1% but household spending on motor fuels increased by over 6%. The question is: Is this a sign of sustainable economic recovery?

Comment

Robert Macnab, director of research at Verum, which carries out the analysis, said: “Having followed the average fuel price so closely for so long, the sharp rise in consumer spending on fuel from April 2014 onwards is an intriguing development. Remember, it was a rise in oil and fuel prices which caused household discretionary spending to contract in 2008/09 and tipped the UK economy into recession.

“If the recent higher spending on motor fuel is sustained, we can expect an acceleration in economic activity over the coming weeks and months. It is not the increase in fuel spending itself that is significant, rather what it represents. Families are doing more miles and they are travelling to spend, whether that is on shopping, eating out, going to the cinema or visiting friends. If this behaviour spreads, it will have a positive multiplier effect on the UK economy.

“Lower fuel prices will also encourage companies to use their vehicles more, resulting in an increase in business activity, while transportation costs for many products will fall as well.

“Looking at the trend in more detail, it is important to note that pump prices had started to fall in Q4 2013, so there was a lag effect. Once households realised that lower fuel prices were sustainable, and might fall even further, they began to spend more on fuel. Q2 2014 therefore saw a step change in the fuel-price and fuel-demand relationship.

“Some economists and investors have voiced concerns that the recent oil price falls mean that global demand may be weakening. However, this latest UK data suggests that lower fuel prices are stimulating an increase in spending, particularly among households.

“There seems to be a growing perception among households that we have finally turned the corner economically. This is borne out by Verum Financial Research’s analysis of ONS household spending data, which reveals that UK household discretionary spending rose at its fastest rate for over 15 years.

“Higher employment and signs of rising incomes are supporting this sentiment. However, expectations of pay rises will need to be fulfilled soon otherwise the first interest rate rise could well shake this fragile returning confidence.”

Source: Verum Financial Research


Posted by Sue Robinson on 13/02/2015