Consumer spending predicted to outperform economy
Consumers are set to continue spending despite economic uncertainty over Brexit but could begin to tighten the purse strings over the next two years, according to a new report.
The EY Item Club forecasts for 2019 predict UK consumer spending growth of 1.6% in 2019, below 1.8% last year.
It continues a trend of slower spending growth, at half the rate of 2016’s 3.2% rise.
But the estimates put consumer spending ahead of economic growth as a whole, with gross domestic product (GDP) forecast to grow by 1.3% this year.
Howard Archer, chief economic adviser to the EY Item Club, said: “The improvement in purchasing power has meant that consumers have been significantly less affected in their spending decisions than businesses by uncertainties over the economy and Brexit.”
He added: “However, we suspect earnings growth peaked in early 2019 and is likely to remain modestly below this level over the rest of 2019 and possibly beyond.
“We believe labour market strength will increasingly fray over the coming months as companies tailor their behaviour to a lacklustre domestic economy, prolonged Brexit uncertainties, an unsettled domestic political situation and a challenging global environment.”
Weak levels of inflation will prop up spending power, as households see smaller price rises compared with the last few years.
In May, the Consumer Prices Index (CPI) rate of inflation hit 2%, the level at which EY Item Club expects it to stay for the remainder of the year.
It could even hit a low of 1.7% in August, according to forecasts.
This will put less pressure on household finances, despite an expected peak in earnings growth.
But those in the so-called “squeezed middle” are likely to fare worse in the near future.
Mr Archer said: “Workers at either end of the income distribution should fare best over the next few years.
“Lower earners will see their spending power boosted by increases to the National Living Wage (NLW), a higher personal allowance income tax threshold and lower inflation in the food, petrol and energy categories.
“While those at the upper end will benefit from skills shortages which is likely to push up wages. The middle will remain squeezed, earning too much to benefit from the NLW, losing support from over-indexation of tax thresholds, and automation subduing their wages.”