UK: Consumers set to ‘loosen their belts’, sayd Ernst & Young Item Club
- Credit: PA
Consumers are predicted to “loosen their belts” this year and drive economic growth with a high street revival.
However, people will continue to feel “bruised” by the effects of years of tight budgeting and spending levels will not return to those of the pre-recession era until around 2015, according to forecasts from the Ernst & Young Item Club.
Much of the expected boost will be triggered by Government policies around income tax and the housing market which will give people more cash in their pockets.
People are tipped to return to the high street amid an uplift in confidence from signs that the housing market is recovering and “generous” increases in the income tax personal allowance which will see basic rate taxpayers taking home nearly £300 extra this year.
Consumer spending is set to grow by 1.2% this year before rising to 1.9% in 2014, according to the report. Further spending growth of 2.2% is predicted in 2015 - at which point the level of spending will have returned to its pre-financial crisis peak - with growth rising to 2.6% a year from 2016.
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Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said the UK “has essentially returned to relying on the consumer to drive economic growth”.
The report said consumers will “loosen their belts” and start spending again on TVs, tablet computers, smartphones and package holidays. As a result, spending in the recreation and culture sector is expected to grow by 5.9% this year.
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Communications products and services are also expected to perform well as rapid technology advancements, new product launches and falling prices help to drive demand.
Clothing and footwear is also expected to perform relatively strongly over the next few years, although growth will be well below that in the decade before the financial crisis, the report said.
Mr Spencer said: “The high street revival is gathering momentum. A happy coincidence of converging factors, supported by Government policies around income tax and the housing market, will lead to the revival of consumer spending over the next three years.”
Lenders, estate agents and property websites have been reporting signs of activity returning to the housing market, with strengthened demand from buyers and sellers appearing more confident about sticking closer to their asking prices.
The upturn in activity has been helped by Government schemes such as Funding for Lending, which has increased mortgage availability and made mortgage payments for new borrowers cheaper, with lenders offering some of their lowest ever rates.
The Home Builders Federation also reported last week that the Government’s Help to Buy scheme, which is specifically aimed at people with smaller mortgage deposits, has got off to a “flying start” in its first two months.
There has also been a general trend in recent years of consumers trying to pay off their debts and shore up savings.
This indicates that many households have already made “the hard yards” in reducing their debt levels, which should help support consumer spending growth, the report said.
But Mr Spencer also cautioned that despite the signs of improvement, consumers will still feel “bruised” by the experience of several tough years on household budgets and retailers should not expect them to spend as freely as they did before the economic downturn.
The report said the boost from lower income tax payments will be dragged down by weak employment and social benefits growth.
Real household disposable income is expected to grow slowly over the next couple of years but then pick up around 2015 as wage bargaining power improves.
As household income growth picks up, spending will strengthen in the more “elastic” sectors such as cars and hotels and restaurants, the report predicts.
Mr Spencer said: “Any hint of adverse economic developments is likely to provoke an immediate blip in spending and a retreat from the local restaurant back to meal deals and nights on the sofa.”
Item stands for Independent Treasury Monitoring Model and uses the Treasury’s model to analyse policy and the economy.