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(Bloomberg) — For British consumers still reeling from Labour’s first budget, the watchword is caution.

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Pessimism is rife and households are looking to cut their expenses, for example by eating in rather than dining out, figures last week showed. Inflation is resurgent and fear of job losses mounting. Gone too are the so-called excess savings built up during the pandemic, the victim of the savage increase in prices since then. 

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It’s a bleak picture for Prime Minister Keir Starmer and his Labour government, which swept to power in July promising to raise living standards. Instead, the economy is smaller on a per-capita basis and Labour is sliding in opinion polls. Alarm bells are also ringing at the Bank of England, where two policymakers this month called for interest rates to be slashed by a bumper half percentage point. 

In the UK, trying to rev up the economy and generate much-needed tax revenue without the consumer is an uphill struggle, as their spending accounts for two-thirds of gross domestic product. 

Chancellor of the Exchequer Rachel Reeves has announced plans to tubocharge growth by spending big on housing and infrastructure. But for many workers, the focus is more immediate. Will they still have a job or get a pay rise after April when their employers are hit by a £26 billion ($32.9 billion) payroll-tax increase and another big hike in the minimum wage?

“The weakness in spending reflects both cost-of-living factors and confidence,” said Jessica Hinds, director of economics research at Fitch Ratings. “We also now face a cooling labor market, with businesses’ demand for staff in decline. That will worry households given the big shocks that have hit their personal finances over the past five years.”

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For some, the hope is that caution will give way to confidence as uncertainty dissipates and interest rates fall further. 

Wages are rising faster than prices, so living standards are improving. Households are now sitting on more than £2 trillion of savings, up almost a third since the end of 2019. Yet that increase has barely kept pace with consumer prices. Adjusting for inflation, savings are only 5% higher than pre-pandemic, and well-below long-term trends. 

“The idea that consumers have a lot of savings waiting to be unleashed once confidence recovers is a misnomer,” said Raoul Ruparel, director for Boston Consulting Group’s Centre for Growth.

The lowest-paid jobs are seeing the strongest wage growth, according to data from Indeed. However, the poorest households are likely using the extra cash to cover essential bills and pay down debt rather than splash out on discretionary items. 

Meanwhile, excess savings generally accrued to wealthier households, who are “less likely to spend them and instead view them as a store of wealth,” Hinds said. “While bank deposits have increased significantly, in real terms the household sector will not feel substantially better off.”

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Consumer confidence plummeted last year when the Labour government warned of “difficult” decisions to fill a fiscal black hole inherited from the Conservatives. The £40 billion tax increase subsequently unveiled in the October budget was even worse than had been feared. Much of it was aimed at businesses, which are now looking to cut headcount and raise prices to protect their margins.

The economy grew just 0.1% at the end of 2024, thanks in large part to government spending. Consumer spending was flat, and GDP per person fell for a second straight quarter. Now Britons are facing heightened geopolitical uncertainty and a new wave of pressures from rising energy and food costs. GfK found households more inclined to save their money than indulge in major purchases this month.

“Many families in Britain do not have enough accessible savings to cushion cashflow shocks,” said Molly Broome, a senior economist at the Resolution Foundation think tank.

Households have become more frugal in recent years. They are spending less in real terms on items that saw prices surge during the pandemic such as bread or utilities, and switching to cheaper alternatives elsewhere, for example by buying more personal care items instead of going to hair salons, according to official data.

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At the same time, housing costs are consuming a larger share of earnings, leaving less available to be spent in shops and restaurants. New tenants are spending about a third of their gross incomes on rent, up from an average of around a quarter between 2019 and 2023. And about a third of those on fixed-rate mortgages are set to refinance at higher costs, according to BOE estimates.

At the BOE, concern over the state of the British consumer came from an unexpected quarter earlier this month. Catherine Mann, until then its chief hawk, stunned markets by dissenting from the majority on the Monetary Policy Committee in favor of a half-point rate cut. In a speech following her dramatic switch, she said that consumer reticence is likely to keep demand subdued beyond 2025.

“The dynamics of soft sales volumes, already observed for a year, will be accentuated as household savings rates remain high, both as an ongoing precaution against volatility in purchasing power and then also on account of heightened unemployment concerns,” Mann cautioned.

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