The hospitality sector has borne the brunt of the challenging economic climate, as cash-strapped consumers have turned increasingly to value according to NatWest Group Chief Economist Sebastian Burnside.
In his session entitled Economic Outlook: Navigating Changing Dynamics to Shape a New Trajectory on day one of the AHC, Burnside said that the UK economy has proven surprisingly robust in recent years, but warned that different market sectors have faced different challenges, with hospitality caught between higher costs and the squeeze on personal finances.
“The UK economy has shown great resilience, so we think that the UK economy is operating about 3% higher than before the pandemic, which is an entirely creditable performance compared with Continental Europe,” he told delegates, highlighting professional services and IT and technology as the stand-out growth drivers post-Covid.
However, manufacturing is still running at 5 per cent below pre-pandemic levels, which in part is because energy prices have remained very high compared with rival European countries.
“And hospitality is the other sector lagging, which has got it from both sides,” Burnside said. “You [the sector] have experienced some of the biggest cost increases and at the same time have been hit by the cost of living squeeze.”
Consumers turn to value
He did, however, suggest that there was a “decent chance” of a cyclical upswing, with January 2023 the inflation peak at around 11%, with Burnside saying that the factors that drove it then were very different from those that are impacting the 2% target today.
“The vast majority of interest rate pressures are now from services, which is really a wages story and that is going to dictate the pace of interest rate decreases. The market broadly expects about 0.25% sliced off each quarter, heading towards about 3.5% which is where it might settle,” he said.
Turning to consumer behaviour specifically in the travel and hospitality sectors, Burnside said that customers are behaving in a very value conscious way and there had been a “marked spend” away from restaurants and towards fast food outlets for dining. Meanwhile, airlines and travel agents have seen spend go up, while domestic hotel expenditure has been down.
Burnside pointed to the spending behaviour of re-mortgage customers at the bank and said that 12 months ago those who needed to re-mortgage generally saw the biggest increases in their interest rates. Looking at the behaviour of these customers since, they have been typically trading down from premium supermarkets such as Waitrose and Marks & Spencer towards value operators such as Lidl.
“These changes are layered on top of structural and societal changes and they are probably best characterised by what it feels like for consumers as they are going up and down their high streets,” he said.
Pubs numbers down
Citing the growth and loss of specific types of outlets from the Local Data Company over the past 12 months, he added that high streets “are not at peak coffee”, and added that there has been significant fast food outlet growth, while pubs had seen the single biggest reduction in numbers.
Turning to the upcoming Budget, he said that data information from think-tank Resolution Foundation, which took into account incomes projected forward and adjusted for all the major expenditure elements that matter across the income spectrum, indicated how Labour may tackle the current situation between the income brackets.
“On real incomes, wages have finally beaten inflation but at the same time private rental costs mean that people on lower incomes are not feeling better off. So I expect a very progressive budget to take the burden off the poorest,” he said.