Household expenditure looks set to have a major impact on UK businesses in the months ahead. Consumers are being hit by a ‘triple effect’ of high inflation, low earnings growth and the side effects of Government measures to reduce the public sector borrowing requirement (PSBR). As a result, real household consumption fell in 2010 and, according to statistics from the Centre for Economics and Business Research (Cebr), it will fall again over 2011.
There are a number of variables at work that will have a strong influence on consumer expenditure.
The first is inflation, which is being fuelled by commodity prices and VAT rises. We expect 2011 inflation to come in at 3.9%, the highest since 1992. With earnings growth forecast to grow by only 1.9%, it is clear that UK households are having their spending power eroded.
Yet if commodity price falls, like those experienced in early May, are sustained we may see some light at the end of the tunnel. Weak growth and the fact that VAT rises will eventually drop out of the index also suggest that high inflation could be less of a problem going forward. On the risk side, commodity shortages and loose monetary policy could fuel further inflation.
Inextricably linked to inflation is perhaps the most decisive factor of all: interest rates. Their future direction will have a major impact on the consumer. While rising inflation has put more pressure on the Bank of England to increase rates, the overall weakness of the economy looks set to prevent this happening imminently.
Despite low interest rates, the housing market remains weak. Halifax data shows average house prices some 3.7% lower in April 2010 than the same time a year ago, and mortgage approvals still about half their pre-recession level. House prices are likely to fall 1.4% in 2011, but a positive trend from 2012 onwards.
While there may be some grounds for optimism beyond 2012, the present environment is tough. So, while consumer-facing sectors have so far avoided the worst effects of the recession, those that rely on discretionary spending, like Personal Services, Retail, Leisure and Hospitality, are now likely to be the worst affected.
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