Consumers to drive growth as spending gathers momentum

WITH more cash in their pockets and a confidence boost from a strengthening economy, consumers are set to return to the UK high street, according to a report released today.

But the Ernst & Young (EY) ITEM Club report warns that consumer spending won’t return to pre-recession levels for another two years.

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. A strengthening economy, high levels of employment and a recovering housing market are also expected to boost confidence, according to the EY ITEM Club.

Consumer spending is set to grow by 1.2% this year before accelerating to 1.9% in 2014, according to the report. The EY 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.”

But Spencer warns that despite showing strong signs of life, consumers have been bruised by the experience of several tough years and will remain nervous and cautious in their spending habits.

“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 said.