Any relief for the consumer in 2012?
By John Hawksworth, Chief Economist
2011 was a tough year for the UK consumer. While average earnings grew by only around 2%, consumer price inflation accelerated to a peak of over 5% in the autumn due to the VAT rise in January and the pressure from rising global prices for energy, food and other commodities. At the same time, public sector job cuts accelerated from April onwards while earlier healthy rises in private sector employment fizzled out as companies sat on their hands in the face of a slowing economy at home and a growing crisis in the Eurozone.
Consumer spending did still go up in cash terms last year, but looks likely to have fallen in real terms in 2011 as a whole despite a renewed fall in the household savings rate. As the chart below shows, real consumer spending per person has grown at the slowest average rate over the past five years of any such period in the post-war era.
Will 2012 be any better? The employment outlook still looks pretty grim and earnings growth seems likely to remain subdued. Consumer credit will also remain constrained for some time to come and there are limits as to how far households will be prepared to dip into their savings when job insecurity remains high and younger people in particular are having to save more to buy their first home.
But there is one potential bright spot and that is the expected fall in price inflation, which has already declined from a peak of 5.2% in September to 4.2% in December 2011 and could be down to close to 2% by the end of this year as past rises due to the VAT hike and global commodity price increases fall out of the 12 month inflation calculation. We have already seen some welcome cuts in domestic energy bills in early 2012 and would expect more good news on inflation as the year goes on. This will lessen the squeeze on real household incomes that was such a feature of 2011. Pensioners will also benefit from a relatively generous increase in state pensions this April based on indexation to a peak level of inflation of over 5% last September.
So our main scenario is that consumer spending will be broadly flat in 2012 in real terms and rising by around 2.5-3% in cash terms. But just as important for retailers and other consumer-focused businesses is the distribution of that spending. We expect three important trends here.
First, the rapid shift from high street to online spending will continue, although an increasing number of consumers will shop across channels, researching and sometimes purchasing on the internet but often still browsing and picking up goods from their local stores.
Second, price competition between retailers will remain intense as value for money remains top of the consumer agenda.
Third, consumers will continue to economise in a variety of ways: eating at home rather than in restaurants; holidaying in Cornwall rather than Cannes or Cancun; fixing up their existing house rather than buying a new one; mending and making do rather than splashing out on a new outfit.
So while there may be some relief for consumers as price inflation heads down, it will remain a very challenging environment for companies seeking to adjust to these trends.
|Contact:||Email John Hawksworth | Tel: +44 (0)20 7213 1650|