Lack of consumer spending continues to dampen economic recovery
The latest economic data suggest that growth in the economy continues to disappoint.
Growth over the past 12 months has been only 0.7 per cent, output is still 4 per cent below the level achieved in the peak of the cycle. A complex set of factors are contributing to the lack of momentum but at the heart of the problem is the consumer, consumer activity is the engine of economic growth and is the source of about 70 per cent of output. The reason the engine is misfiring is the squeeze on spending power. At the macro level there is a high level of unemployment and underemployment, the trends for which remain negative as public sector job cuts accelerate. Wage growth too is lagging inflation; earnings in the private sector are growing by about 2.5 per cent, in the public sector they are static. Both of these are substantial negatives. But there is also significant pressure on how income is spent. Over the past two years non-discretionary spending on items such as food and fuel have increased far faster than general prices. This has meant that the proportion of take-home pay over which there is true spending choice has fallen by about 5 per cent for each of the past two years. At the start this squeeze was offset by falling mortgage costs, more recently savings rates have declined but the gains from these sources have not been sufficient to allow consumers to maintain their spending power. This is reflected in economic statistics but is mirrored too on the high street with a number of casualties already this year including Focus, Habitat and Jane Norman. Looking forward, inflationary pressures are expected to moderate later in the year and there are some signs that wage growth is edging higher but any improvements are likely to be slow, with the gains vulnerable to external factors such as a spike in the oil price or further upward pressure on food cost.
Author: John Kelly
John Kelly is head of client investment at CCLA.
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