ITEM Club forecasts recovery in consumer spending

Date: Monday 28 May 2012

At the end of quarter four of 2011, sixteen quarters on from its cyclical peak, consumer spending was 6% below its pre-recession peak, whereas at that same point in previous cycles it was already 2.9% (1990s) and 4.8% (1980s) ahead.

The above shows just how hard a five year period the consumer sector has had to endure, resulting from a combination of high inflation and weak earnings growth causing a severe squeeze on household finances and a steep decline in spending. Yet some light has emerged at the end of the tunnel, after enduring the most severe of those years in 2011, according to the Ernst &Young Item Club special report on consumer spending published this morning.

The above in so far as oil prices continue to cool, allowing the CPI to move back towards target by the end of the year, which would allow prices to fall back in line with wages.

"When personal tax changes are factored in, the situation looks better still, with the majority of consumers set to benefit from successive large increases in the income tax personal allowance which should ensure that most see real take-home pay stabilise this year and accelerate next,” adds the Item Club; with those earning between the median wage and the basic rate limit for income tax expected to be the biggest winners.

Consumer spending is thus forecast to rise by 0.8% in 2012, followed by a 1.1% rate of expansion in 2013, with growth picking up further in subsequent years.

Nonetheless, the consumer recovery will continue to be constrained by the need for households to deleverage further and then by the impact of higher debt servicing costs as interest rates begin to normalise and spending is not expected to return to previous peaks until mid-2015.

AB

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