Housing boom set to fuel high street spending predicts ITEM Club
HOUSING and the high street will continue to drive the UK’s short term growth, a new study has predicted.
Ernst & Young ITEM Club said that with over one million housing transactions expected by the end of the year and rising disposable incomes more money was set to wash down into the economy.
In its latest quarterly forecast, the ITEM Club said the increase in the personal allowance and the Government’s Funding for Lending would maintain the momentum of the recovery; a situation further boosted in 2014 by the introduction of the Help to Buy Scheme as outlined by the Chancellor in the Budget.
The ITEM Club said it was forecasting GDP growth of 0.6% this year, before increasing to 1.9% in 2014 and 2.5% in 2015.
Peter Spencer, chief economic advisor to the ITEM Club, said: “With export markets continuing to disappoint, the Chancellor has focussed his firepower on the home front. And the timing couldn’t have been better. Real incomes are already starting to recover, mortgages are becoming more readily available, and homes are more affordable as the house price to earnings ratio continues to fall.
“Although it’s not a long term strategy, stimulating the housing market and the high street will keep GDP growth positive. Unbalanced growth is better than no growth.”
According to the report, the increase in the personal income tax allowance will add 0.4% to disposable incomes over the next two years. Combined with strong employment levels, which have allowed income growth to overtake inflation, the ITEM Club expects someone earning the national average salary of £23,000, to have an extra £280 in their pocket by the end of the year.
Mr Spencer said the extra cash in people’s pockets would feed through to higher levels of spending on the high street.
“At last, there’s some good news for household finances. We should start to feel slightly better off this year, which will help to loosen the purse strings. Consumer spending added 0.7 percentage points to GDP in 2012 and the Chancellor’s Budget will help ensure the tills continue to ring for some time yet,” he said.
The ITEM Club report expects consumer spending to increase by 1.2% this year and 1.9% in 2014. But the 2.2% growth predicted from 2014-16 is well down on the 3.7% a year it averaged in the decade prior to the financial crisis.
“Don’t expect a return to pre-crisis levels of spending”, warned Mr Spencer. “Consumers have been burnt by the experience of the recession and are much more cautious with their finances. Households are likely to continue paying down debt rather than racking up huge credit card bills.”
Personal debt levels are currently 146% of disposable income last year, down from the peak of 174% in 2007. The Ernst & Young ITEM Club says this is likely to stabilise at around 136% by 2016.
