Special report on consumer spending

The consumer is back but not like before.

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In his March Budget, the Chancellor effectively admitted defeat in his attempts to rebalance the UK economy. At best, the plan to move from an economy dependent on consumption to one led by exports and business investment is on hold — and the UK has essentially returned to relying on its old friend, the consumer, to drive economic growth.

The latest EY ITEM Club special report on consumer spending reflects this shift. With consumers having struggled against falling real incomes since the onset of the financial crisis, in 2012 consumer spending was still 4% below its 2008 peak.

However, the beleaguered UK consumer finally began showing signs of life in 2012, following a recovery in real household incomes driven by employment growth, the uprating of social benefits, and weaker inflationary pressures, as highlighted in our recent special report on inflation.

Last year’s remarkable labour market performance is unlikely to be repeated in 2013, and inflation is not expected to slow significantly from its current levels. But the impact of these factors will be partially offset by the boost to take-home pay from the increases in income tax personal allowances.

Taking all these factors into account, ITEM expects that the upturn in consumer spending will gradually gather momentum, with growth of 1.2% in 2013, 1.9% in 2014 and 2.2% in 2015. These growth rates may mark a step-change from the past five years, but they are nowhere near the levels seen in the decade leading up to the financial crisis.

Peter Spencer, Senior Economic Adviser to ITEM Club