The consumer is back: but not like before


The return of an old friend

In his March Budget, the Chancellor effectively admitted defeat in his attempts to rebalance the UK economy. At best the plan to move the economy to one led by exports and business investment is on hold and we are back to relying on our old friend, the consumer, for economic growth. The latest EY ITEM Club special report on consumer spending predicts a gradual increase in momentum with consumer spending growth of 1.2% in 2013, 1.9% in 2014 and a positively giddy 2.2% in 2015. These growth rates are nothing like the levels we saw during the decade leading up to the financial crisis, but they are significantly better than we have become accustomed to: consumer spending in 2012 was 4% below its peak level in 2008. 

After such a significant slowdown, caution on the part of business to embrace this consumer revival is understandable. But it is possible that momentum will build quickly and the overly cautious may get left behind. Businesses need to understand what is happening and use this knowledge to guide their planning and investment decisions. The key to success will be understanding the detail and what is likely to happen at a disaggregated level.

All together now

The EY ITEM Club special report identifies how a number of drivers are coming together to create a perfect storm to drive a revival in consumer spending. Consumer confidence is rising but consumers have been through 5 difficult years and remain nervous. Hence any adverse news is likely to provoke an overreaction and an immediate blip in spending growth. Business must stay close to the fundamental drivers of change to ensure it does not make incorrect, snap decisions. The key drivers of the improved consumer outlook are:

➢ Continuing high levels of employment and hence overall employment income, albeit with growth slowing  from recent rates;

➢ Growth in real incomes as inflation eases slightly and the medium term of impact of labour’s improved bargaining 

➢ Favourable changes to the tax and benefits system at least in the short term increasing spending power

➢ A slowing of household deleveraging as debt levels have reached more sustainable levels;

➢ A boost from the housing market as transactions and prices rise in response to greater availability of funding and the Government’s support for buyers.

The actual path of development of each of these factors requires close monitoring so that plans can be adapted as appropriate.

But this time it’s different

Consumer spending is forecast to drive UK economic growth but this is not the consumer boom we experienced prior to the recession. The crisis has taken its toll and we have a new consumer paradigm; we will see wider variation by segment and much more caution in decision making.  Spend will vary by segment as the economic circumstances facing each segment vary:

➢ The changes in the tax and benefits system will disproportionately impact the lower income segments, especially around the 20th and 30th deciles;

➢ The higher income groups are likely to have more bargaining power in the labour market as the economy picks up;

➢ Pensioners will on average benefit more than many other segments; and

➢ Consumers with strong positions in the property market are likely to start to spend more on household goods.

As always in the post-crisis economy, understanding and monitoring the detail will be vital. Business must analyse how demand for its products and services will play out by segment and operate accordingly. 

The purse strings may get looser

We are not expecting a consumer boom, however as confidence and incomes grow we expect that consumers will start to stretch their expectations and buy more discretionary goods. Automotive sales have held up well in the UK and we expect people to start to indulge in more of life’s little luxuries. Spending on recreation and culture and communications sectors, which include goods such as in-home technology, will be amongst the fastest growing and there should be good news for the travel industry. As the housing market picks up  we can expect to see an increase on household good spending



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