Member Article

Consumer spending to bolster the economy

Consumer spending will return the UK economy to growth, suggests Ernst & Young’s economic forecasting group, the ITEM Club.

In its most recent report, the ITEM Club say that falling inflation and rising employment levels will contribute to stronger consumer spending, which it predicts will gather pace next year, supported by a resurgence in the housing market.

The autumn forecast says “deeply disappointing” trade figures have relating to exports have stifled growth over the last six months, and GDP will be -0.2% overall this year, before increasing to 1.2% in 2013 and then 2.4% in 2014.

Disposable incomes are forecast to increase by 1% this year, and 1.4% in 2013, which is forecast to feed consumer spending growth of 0.6% and 0.8% respectively.

The late spurt in growth however will not be sufficient to meet the Office for Budget Responsibility’s (OBR) deficit forecast of £95bn for 2012/13, say the ITEM Club.

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said: “With exports being battered by the Eurozone crisis and a weakening economic outlook in markets such as the US, India and China, the UK is relying heavily on the high street to come to the rescue this year.

“The fundamentals are in place to enable this to happen. Inflation is coming back to heel, private sector employment is holding up, and the housing market also looks poised for a revival. But it’s not the balanced, long term sustainable growth we were hoping for.”

The report also predicts the housing market will bottom out this autumn, before recovering in spring next year.

Peter continued: “The latest credit conditions survey shows that one of the biggest headwinds facing the UK has now begun to ease – lending has started to loosen up and we’re hopeful that the housing market is primed for a recovery early next year.

“There are though plenty of ‘ifs’ and ‘buts’. The big question is the extent to which consumers will choose to grasp the opportunity or continue to deleverage and to pay down their debts.”

The Public Sector Current Budget (PSCBX) and Public Sector Net Borrowing (PSNBX) is expected to overshoot by around £8bn.

Commenting on this, Peter added: “Public finances have been hit with a pincer movement of higher spending and lower tax receipts, which is causing the UK to slip against the OBR’s deficit forecast.

“We think this is largely cyclical but the OBR may view this deterioration as structural and suggest that further policy tightening is necessary after the election if the Chancellor is to meet his fiscal targets.

“Consumers may be propping up a weak recovery this year but the move towards balanced growth over the medium term hangs critically upon a recovery in world markets.

“However, even if the US negotiates the impending fiscal cliff and Euro policymakers actually do what it takes to save the single currency, these markets will still be held back by austerity and retrenchment. A lot still hangs in the balance and risks dominate the outlook.”

This was posted in Bdaily's Members' News section by Tom Keighley .