UK consumer recovery slowest in 180 years

1st June 2011

The report says that families are expected to spend just slightly more by 2015 than they were before the financial crisis hit in 2008, as high inflation, tax rises and slow wage growth eat into disposable incomes.

In the 18 major recessions since records began in 1830, Bank of England data show that consumer spending on average recovered to 12% above its previous peak within seven years, the Financial Times (paywall) has discovered.

According to forecasts from the Office for Budget Responsibility, spending in 2015 will be just 5.4% above the 2008 peak, making it the slowest recovery of any comparable post-recession period.

"The recession may have been relatively benign for households, but the recovery is going to be particularly awful," Simon Kirby, an economist at the National Institute for Economic and Social Research, told reporters.

British consumers have not experienced such a slow recovery in their spending power since 1970s-era stagflation. A period of stagnant spending growth could mean that consumers will barely feel the difference even as the economy expands.

"Everyone will hear and read about the economy growing in the news, it's just that households are not going to notice it," said Kirby.

Henderson's Chief Economist, Simon Ward, is sceptical of the view that the consumer is a major cause for concern in terms of the economic recovery and believes that consumer spending will resume growth over the coming quarters and contribute to an ongoing rise in overall output.

He makes a number of points, and says: "First point to make is that the weakness in real spending over the past year hasn't reflected a reluctance of consumers to open their wallets…the outlook for consumer spending is improving. The problem has been the spiking inflation which has resulted in that nominal increase being frittered away in prices…

"The outlook for consumer spending is improving. Pay settlements are moving up, and averaging one percentage point more than a year ago and this should start to be reflected in official average earnings numbers as we move through the year…

"In addition inflation is going to fall sharply from late this year so that implies that we could see real average earnings growth for a while, and unemployment on an upward trend boosting the pool of purchasing power."

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