Consumer spending to outperform economy as a whole but challenges lie ahead
Consumer spending is forecasted to outperform the economy as a whole in the next year, but growth in households’ real disposable income is set to slow down after a spike in 2018.
The EY ITEM Club has predicted that consumer spending will rise 1.6 per cent in 2019 and 1.7 per cent in 2020, falling from 1.8 per cent, 2.2 per cent and 3.2 per cent in 2018, 2017 and 2016 respectively.
Meanwhile, gross domestic product (GDP) is expected to grow at a slower rate of 1.3 per cent in 2019 and 1.5 per cent in 2020.
“The improvement in purchasing power has meant that consumers have been significantly less affected in their spending decisions than businesses by uncertainties over the economy and Brexit,” said Howard Archer, the chief economic advisor to the EY ITEM Club.
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Archer added: “While consumer confidence in late 2018/early 2019 weakened to the lowest level since mid-2013, perceptions of personal finances and a willingness to spend generally held up much better than views of the economy.”
Real household disposable income growth also improved to 2.2 per cent in 2018, rising from 0.5 per cent in 2017 and a drop of 0.2 per cent in 2016.
However, EY ITEM Club says that the outlook for consumers is going to be relatively challenging over the next two years.
Archer said the firm suspects earnings growth peaked in early 2019 and is likely to remain modestly below this level over the rest of 2019 and possibly beyond.
“We believe labour market strength will increasingly fray over the coming months as companies tailor their behaviour to a lacklustre domestic economy, prolonged Brexit uncertainties, an unsettled domestic political situation and a challenging global environment,” he said.
Last week the Bank of England said it expects economic growth to be flat in the second quarter of the year, having previously predicted growth of 0.2 per cent over the period.
Read more: Bank of England cuts growth forecast
The Monetary Policy Committee (MPC) said: “That in part reflects an unwind of the positive contribution to GDP in the first quarter from companies in the United Kingdom and the European Union building stocks significantly ahead of recent Brexit deadlines.” The MPC added that since its previous meeting, the “near-term data have been broadly in line with the May Report, but the downside risks to growth have increased”.