All bets on bruised consumer to drive growth, as spending gathers momentum, says EY ITEM Club report

10 June 2013

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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 special report released today by the EY (EY) ITEM Club. But, the 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 EY ITEM Club, comments: “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.”

What we are spending on and the impact on our high streets

Following a dismal five years 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 of this shift spending in 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.

Julie Carlyle, Head of UK Retail at EY, comments: “While a return to sustained growth in consumer spending is good news for the high street, a closer look at the figures reveals an underlying story for the evolving retail sector. There is an increasing battle from retail and leisure activities for our pound spend in the coming years and this will add to the transformation of the high street.

“The challenge for retailers is to remain relevant and to come up with a proposition that will attract spending. Speed in responding to changing trends and the right use of data to gain insights into consumer habits will help retailers to adapt and stay ahead of their game.”

Income growth slows this year…but picks up in 2015

However, the report warns that income growth is likely to be slower this year and next, as employment growth in 2013 and 2014 is likely to be only around half of the exceptional performance of 2012. The EY ITEM Club says the boost from lower income tax payments will not be sufficient to offset the drag from weaker employment growth and lower growth in social benefits.

The EY 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.

Spencer explains: “These rates are well short of historical norms. Over the twenty years prior to the financial crisis, for example, household disposable income growth averaged at 3.5% a year. However, they nevertheless represent a step up in performance since the beginning of the global financial crisis and should still manage to sustain the recovery in consumer spending.

“Although the tills will continue to ring, retailers shouldn’t expect to see their customers spend as freely as they did prior to the recession.”