Britain’s Consumers Are Turning Cautious as Cost Pressures Mount

British consumers are showing increasing signs of strain in the face of soaring fuel, energy and mortgage costs, with the prospect of tax hikes in the budget this month threatening further pain ahead.

Evidence is mounting that more households are feeling squeezed, with many taking on more debt to get by. Others are saving more as a summer of political optimism and World Cup euphoria is replaced by anxiety about the conflict in the Middle East and its growing grip on family budgets.

Beneath what has been surprisingly robust economy — underscored by another strong GDP print on Thursday — consumer confidence is stalling and retailers are stretching out promotions. Shoppers are abandoning dining out and buying big-ticket items, directing spending toward feel-good purchases like cosmetics and premium supermarket meals.

The speed of the pullback suggests many Britons are still scarred from the price shocks of recent years, and aren’t yet feeling the “breathing space” that Prime Minister Andy Burnham has promised to deliver. Kien Tan, a senior retail adviser at PwC UK, described the all-important British consumer as looking like a “rabbit in the headlights” bracing for impact.

Consumers matter for the UK because their spending contributes around 60% of gross domestic product, a larger share than in other major European economies. They underpin the tax revenue that Burnham’s chancellor of the exchequer, John Healey, needs to keep borrowing in check and deliver on the government’s ambitious spending plans.

Confidence was ebbing even before the latest resurgence in oil prices, according to official GDP figures on Thursday. While the economy overall unexpectedly grew in August, it was largely thanks to manufacturing. Services reliant on consumers shrank as Britons scaled back on non-essential purchases such as sporting events, restaurant visits and beauty therapies.

The data came hours after a Bloomberg Intelligence survey showed Britons increasingly reliant on credit to make ends meet. Some 55% said they couldn’t cover bills for more than three months if they lost their income, a 13-point increase from a year ago. One-in-10 have recently missed or delayed a payment.

It raises the pressure on Healey to help households with living costs at his budget on Oct. 28. He has little firepower, however, with government debt elevated and bond markets on alert for any signs of fiscal laxity.

Some tax rises are expected to get the public finances back on track, though Healey refused to be drawn in a Bloomberg TV interview on Thursday, saying “speculation in the past has done real damage” ahead of budgets.

“I don’t really foresee anything in the budget that’s going to give a boost to consumer confidence because the government’s hands are tied,” Retail Economics Chief Executive Officer Richard Lim said.

A slew of recent data suggests consumers have turned markedly more downbeat since the early summer, when spending was boosted by warm weather, England’s advance through the World Cup football tournament and the prospect of Burnham coming to power with fresh cost-of-living initiatives.

The British Retail Consortium said like-for-like retail sales rose an annual 1% in September, half the pace a year earlier. Fears of tax rises are weighing on shoppers, prompting them to prioritize small indulgences such as health and beauty products.

A separate Barclays survey also showed that most households are worried about potential tax changes. A third are reducing discretionary spending and building their savings buffers in anticipation of the budget, it said.

GfK’s sentiment report showed consumers were less willing to splash out on big-ticket items in September, a worrying sign in the run-up to the key holiday period for retailers.

Consumers are “suffering” and for some people the cost of living is a “real challenge,” Bank of England Deputy Governor Sarah Breeden told CNBC on Thursday, citing a visit she made to Leeds in northern England last week.

Beyond the budget, economic headwinds are building for consumers, who are bracing for energy bills to surge by more than 20% when the price cap resets in January. It means inflation is set to top 4% early next year, well-above the threshold where it starts to loom large in shoppers’ minds.

Diesel prices have already reached a record £2 ($2.6) per liter and key mortgage rates have jumped close to 6% as the BOE edges toward raising interest rates next month.

BOE figures also show consumers took on an extra £2.5 billion of unsecured debt in August, the most on record. It’s a possible sign they’re turning to credit cards and other loans as pay rises slow and jobs become harder to find.

This coping mechanism, however, is creating levels of distress last seen during the financial crisis. Recent BOE data showed credit card debt defaults rising for a sixth straight quarter, the longest run since 2009.

“I wouldn’t bet on consumers coming to the rescue for the rest of this year,” said Raoul Ruparel, senior director at the BCG Centre for Growth.