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Consumer spending to grow at snail's pace for 6 more years

Consumer spending to grow at snail's pace for 6 more years

Consumer spending is set to stagnate for the next six years, according to leading economic forecasters Cebr. This follows rapid spending growth before the financial crisis and sharp falls in spending during its aftermath.

Over the years from 2002 to 2007 real consumer spending per household rose by 10.4% as the economy performed robustly. Rapid real wage increases and low unemployment meant consumers were happy to spend freely and use borrowing extensively as unsecured lending increased from £150billion to £193billion alongside large increases in secured borrowing. Over those five years the savings ratio declined from 5.1% to 1.7% as households saved less of their income to fund consumption increases.

Real consumption then plummeted by 7.1% on a per-household basis between 2007 and 2013 as the financial and euro zone crises tore through the economy. The free flow of credit dried to a trickle, consumers tightened their belts as real incomes declined and unemployment rose. This pushed the savings ratio up to 6.9% in 2013 - over three times the rate in 2008 - and caused sharp falls in consumption.

Now that the dust has partly settled, the think-tank forecasts real consumer spending per household will rise, on average, by under 0.4% per year between 2013 and 2018 - consumer spending will grow, but at a lacklustre pace.

Households are working hard to save more, guarding against weak pay growth, high unemployment, elevated inflation and Government fiscal austerity which have pushed the median household's real spending power down by 5.1% since the financial crisis.

The Cebr said it expected the savings ratio would hold steady at around the 7% mark until 2018 at the earliest, going hand-in-hand with weak spending growth. Despite low interest rates meaning that returns are poor, consumers are saving more to guard against the post-crisis threats of slow wage growth and unemployment as tight credit conditions also militate against borrowing.

Daniel Solomon, Cebr Economist and main author of the report, said: "The free fall in consumer spending seen during and immediately after the financial crisis has ended and retailers will be relieved that consumer spending is starting to rise again."

"That said, consumption is expected to grow at a snail's pace over the next six years meaning the British consumer cannot be relied upon to pull the economy up by its bootstraps. Retailers won't be opening the champagne just yet."

Charles Davis, Cebr's Head of Macroeconomics, said: "The UK economy is showing signs of recovery but the cost of job creation and relatively low unemployment compared to other downturns has been an extended squeeze on real incomes that isn't over yet.

"Households have had to get used to living within their means as they have been buffeted by the financial crisis, weak economic growth, fiscal tightening and high inflation. We think consumer spending will rise only slowly and a sustained recovery will be unable to rely on consumption. The UK needs improved export performance, business investment and productivity increases - consumers are not going to borrow the UK to growth in the same way as before the crisis."

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George Bailey