UK consumer spending is set to continue to outperform the economy, but potential roadblocks lie ahead.
Although consumer spending growth slowed to a six-year low of 1.8% in 2018, this was a stronger performance than was forecast in the 2018 EY ITEM Club Special Report on Consumer Spending.
This trend for growth to surprise on the upside has continued with an increase of 0.7% over the previous quarter in the first three months of 2019.
The stronger than expected performance was due to more robust employment growth than predicted and a marked pick-up in real earnings growth over the second half of the year. With annual real earnings growth rising from just 0.1% in mid-2018 to 1.5% at the end of 2018, consumer confidence held up much better than business confidence. As a result, consumer spending in 2018 was once again the major driver of UK economic growth.
The consumer remains very dependent on the labour market …
However, as the EY ITEM Club notes, growth of 1.8% in consumer spending was the slowest rate of increase since 2012 and was significantly below the increase of 3.2% in 2016. Spending was also volatile with retail sales a case in point, with wide variations in growth rates throughout 2018. With debt levels having risen and savings rates falling, consumers will need to be confident about their employment prospects if they are to continue to drive the economy forward.
Our sense is that as the EY ITEM Club identifies, earnings growth is likely to slow slightly over the rest of 2019 while the rate of job creation will slow as the labour market softens. The EY ITEM Club expects employment growth will be 1.0% in 2019 and 0.6% in 2020, and that annual earnings growth will average 3.2% over 2019. With average consumer price inflation seen dipping to 1.8% in 2019 from 2.5% in 2018, overall inflation-adjusted pay is forecast to average 1.4% in 2019, down slightly from the end of 2018’s real earnings growth of 1.5%.