U.K. Consumer Spending Growth Set to Slow Markedly After 2015

Real consumer spending growth is expected to remain relatively robust at around 2.3% in 2015, but then slow down to only around 1.7% per annum on average in 2016-20.

• Real consumer spending growth is expected to remain relatively robust at around 2.3% in 2015, but then slow down to only around 1.7% per annum on average in 2016-20.
• The share of consumer spending on housing and utilities is set to rise to over a quarter by 2020.
• GDP growth is expected to average around 3% in 2014, easing slightly to 2.5% in 2015.

Consumer spending growth has been boosted over the past two years by increased confidence and rising house prices, as reflected in a falling savings ratio. But PwC analysis in its latest UK Economic Outlook report suggests there are limits to how low this savings ratio can go. Real consumer spending growth is therefore likely to moderate to around 1.7% per annum on average in 2016-20 as it becomes more dependent on rising household disposable income growth (see Table 1 below).

Table 1: PwC projections of growth in real household expenditure

Source: PwC analysis – the adjusted savings ratio is defined as the difference between household disposable income and expenditure, expressed as a % of disposable income (see Note 1 for further definitional details)

The shares of consumer spending on food, alcohol and tobacco are projected to continue to decline steadily up to 2020, as is that for transport (see Table 3 in Note 2 for details). But these downward trends are offset by rising shares in the housing and utilities category in particular, which is projected to account for more than a quarter of total consumer spending by 2020.

Miscellaneous services - which include financial services spending excluding mortgage interest – is also expected to increase to around 13% of total household budgets by 2020 as lending increases and interest rates go up. Recreation and culture is also projected to see a modest increase in its budget share by 2020 as the economic recovery continues.

John Hawksworth, chief economist at PwC, said:

 “Consumer spending growth has been relatively strong for the past two years despite weak average earnings growth. This has been due to strong employment growth, increased income tax personal allowances and low mortgage interest rates, all of which have boosted real disposable incomes. In addition, increased confidence associated with rising house prices since mid-2012 have been reflected in a falling savings ratio, giving an extra boost to spending over and above disposable income growth.

“Looking ahead, we expect the savings ratio to continue its downward course in 2015 before stabilising in the medium term as it approaches pre-crisis levels. This means that consumer spending growth will become more dependent on real income growth after 2015, and is therefore projected to slow down to around 1.7% per annum on average in 2016-20.

“This slowdown in spending growth will only increase the pressure on retailers already hit by fierce price competition and the disruption to business models from the ongoing shift to online sales.”

UK economy recovering at a relatively strong rate

The UK recovery has now been sustained at an above trend rate for nearly two years since early 2013 after a couple of sluggish years in 2011 and 2012. The report projects UK GDP growth to average around 3% in 2014, the best performance in the G7, before easing slightly to 2.5% in 2015. This would put UK growth behind that of the US in 2015 and similar to Canada, but still well ahead of the three largest Eurozone economies and Japan (see Table 2 below).

Table 2: GDP growth projections for the G7 (%)

Source: PwC main scenario projections

John Hawksworth, chief economist at PwC, said:

“The UK economy has been recovering at a relatively strong rate compared to other G7 economies since early 2013, although there have been signs of a slight slowdown in growth since the summer. Risks to growth are also weighted somewhat more to the downside now than in July due to potential problems in the Eurozone and increased global geopolitical risks.

“The services sector will remain the main engine of UK growth for both output and employment. Manufacturing growth has moderated due to renewed stagnation in our key European export markets over the past six months, while construction sector activity is also likely to slow as house price inflation moderates over the next year.

“Inflation is likely to remain below target in 2015. As a result, we expect the MPC to keep interest rates on hold in the short term but then to increase them gradually during the course of 2015, perhaps returning to around 4% by 2020. Businesses and households should start preparing for this upward trend now.”                                                                                 

Notes:

 1. The measure of the ‘adjusted savings ratio’ that the PwC analysis focuses upon is defined as the difference between household disposable income and household expenditure, expressed as a percentage of household disposable income. This is the most natural way to break down trends and prospects for household spending between a disposable income effect and a savings ratio effect. 

By contrast, the headline savings ratio as defined by the ONS is the difference between total household resources and household spending, expressed as a % of total household resources. Total household resources differ from household disposable income by including ‘changes in the net equity of households in pension funds’.  However, this latter item is relatively volatile and unpredictable and, in practice, it seems unlikely that it has much immediate impact on consumer spending decisions. As such, the PwC analysis focuses on the adjusted savings ratio while noting that, in the past, the direction of movement in these two savings ratios has tended to be broadly similar.

2. Table 3 below sets out in more detail PwC projections for the share of household spending for different categories in 2020, together with implied average annual real spending growth rates for the 2014-20 period.

Table 3: Household budget share projections for 2020 and average annual real growth rates by household spending category in PwC main scenario

Source: ONS for 2013, PwC main scenario projections for 2020

Gill Carson

PwC | Media Relations Manager

Office: 020 7212 1391 | Mobile: 07837 285466

Email: gill.carson@uk.pwc.com

PricewaterhouseCoopers LLP

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