Consumer spending to bounce back as E&Y ITEM Club

CONSUMER spending is set to recover on the back of tax changes and a returning ‘feel-good factor’, but won’t bounce back to pre-recession levels for another two years, according to a new report.

The Ernst & Young ITEM Club believes consumers are taking heart from a strengthening economy and will be more prepared to spend than previously.

Increases in the income tax personal allowance will see basic rate taxpayers taking home nearly £300 extra this year and a further £140 in 2014, bolstering disposable incomes and building momentum behind the recovery in consumer spending.

The ITEM Club says this, along with high levels of employment and a recovering housing market, will boost confidence among consumers.

Consumer spending is set to grow by 1.2% this year before accelerating to 1.9% in 2014, according to the report. The ITEM Club forecasts further spending growth of 2.2% in 2015, at which point the level of spending will have returned to its pre-financial crisis peak, and 2.6% a year from 2016-2020.

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, 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.

“The Treasury’s plan to move from an economy dependent on consumption to one led by exports and business investment has been put on hold. The UK has essentially returned to relying on the consumer to drive economic growth.”

Such positive traction could be short-lived, as Mr Spencer says consumers have been bruised by several tough years and will quickly rein-in spending if sentiment changes.

“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,” he states.

The EY ITEM Club expects consumers to loosen their belts and start spending again on TVs, tablets, smart phones and package holidays. As a result the recreation and culture sector is expected to grow by 5.9% this year.   

Communications products and services are also expected to perform well and grow by 3.6% next year as rapid technology advancements, new product launches and falling prices help to sustain strong demand.

The ITEM Club expects real household disposable income to grow by 1.2% in 2013 and 1.0% in 2014, around half the pace of 2012. As wage bargaining power improves the EY ITEM Club expects real income growth to then accelerate to just under 2% a year in 2015 and 2016.