New analysis of Bank of England data by RSM has found that In May 2023, consumer borrowing fell from £1.5 billion in April to £1.1 billionn. Consumers withdrew £4.6 billion from banks and building societies, which marked the highest level of household withdrawals on record, suggesting households are using savings to pay down debt which has become much more expensive recently.
Although mortgage approvals rose in May, this is likely to be reversed in June as the recent surge in mortgage interest rates depresses demand. RSM says that the higher interest rates and fall in real incomes will limit buyers’ ability to meet high house prices.
Paul Newman, Head of Leisure and Hospitality at RSM UK, said “Rising interest rates are casting a dark shadow on both operators and consumers alike as the increased cost of borrowing takes a tighter grip on finances and debt.”
“With double digit food price inflation, wage increases and still higher than normal energy prices, it’s a heady cocktail of costs. Throw in the latest rise in interest rates to 5% and many debt loaded operators are now faced with another increasing cost line that puts a further squeeze on what are already tight profit margins.”
“Restaurants, in particular, do not seem to be passing on the full extent of rising costs to consumers. Looking at the Producer Price Index in December, food peaked at 16.8% but the Consumer Price Index for restaurant and café operators came in well below this figure at 10.1%. In real terms this means operators absorbed 6.7% of the costs they incurred in rising food and drink prices in one of their peak trading months. In the current economic climate, many operators are prioritising sales, customer satisfaction and menu value leading to an inevitable squeeze on margins.”
“Formal insolvencies in the leisure and hospitality sector have been growing for some months and with the increasing cost of debt alongside the hit to consumers’ real income, it’s inevitable that the financial stresses and strains facing the leisure and hospitality sector will lead to more restaurant and pub closures over the coming months.”
Thomas Pugh, Economist at RSM UK, said “There are still some reasons to be optimistic about the second half of the year. Inflation should fall sharply by the end of the year, and households’ real incomes should start to rise again. However, it now looks more likely that the lagged effect of the huge rise interest rates that has already happened, combined with the risk of further rate rises, tips the economy into recession, either later this year or in early 2024.”