Author Felicity Anderson

2017 was a difficult year for consumer finances with prices rising faster than real wages after the pound fell in the wake of the EU referendum in 2016.

A recent poll of economists by the Financial Times indicates that 2018 isn’t likely to bring a reprieve, with debt and interest rate woes set to replace inflation worries, which are predicted to diminish as the year progresses.

The newspaper reports that according to a majority of those polled, “high levels of borrowing — which helped to sustain consumer spending during 2017 — as well as slightly more expensive credit could constrain the ability of households to spend.”

As a result, the majority of economists, including Neil Blake, head of global forecasting, CBRE, Nicholas Barr, professor of public economics, London School of Economics and Andrew Goodwin, lead UK economist, Oxford Economics, amongst many other leading figures, expect consumers to find 2018 as difficult as last year.

Predictions for inflation in 2018

Many of those polled highlight that inflation looks set to ease in 2018, which will help alleviate price squeezes, although the predictions are modest and unlikely to be enough to help mitigate other potential financial stumbling blocks to consumer spending.

John Hawksworth, chief economist, PwC told the Financial Times that,” inflation may peak over the next few months and ease gradually during the course of 2018, but is still likely to be around 2.5 percent at the end of the year.”

Andrew Goodwin, lead UK economist, Oxford Economics said:

“We expect inflation to drop back below the 2 percent target by the end of 2018, so it will be a better year for consumers than 2017, though that is a pretty low bar!”

What’s going to slow consumer spending?

Economists predict another gloomy year for consumer finances

Easing inflation isn’t enough to boost consumer spending, according to many of the economists polled, who forecast falling house prices, although some claim this will be limited to London, along with the possibility of rising unemployment and stagnating wages.

“The possibility of a prolonged housing-market downturn, a frightening thing to middle-income Britons who have grown to expect effort-free wealth, is likely to enter more and more into the front of people’s consciousness,” said Andrew Oswald, an economist at the University of Warwick.

Ray Barrell, professor, Brunel University London told the newspaper:

“Unemployment has been falling for some years and is at low levels. It is unlikely to fall further, and may rise, constraining consumption.”

“High employment is a good thing for consumer welfare, although the warm glow may not feed into spending unless real incomes rise as well,” he added.

People in receipt of state benefits are also likely to see their purchasing power fall as, “working-age benefits have been frozen in cash terms since 2015,” according to the newspaper.

A rise in consumer borrowing in 2017

2017 saw many stark warnings that consumer borrowing had exceeded 2008 levels and, “grew at an annual rate of close to 10 percent for most of 2017 as households used cheap credit to sustain living standards.”

John Hawksworth, chief economist at PwC, said that while inflation will soon peak and fall back, “there are limits to the ability of households to further increase their borrowing levels.”

“This is likely to continue to bear down on real consumer spending growth,” he said.

David Cobham, professor of economics, Heriot-Watt University, responded that:

“Prices will continue to rise faster than wages while the ongoing austerity continues to hit lower-income households. Consumer spending may be sustained in part by credit, but that can’t continue much longer. ”

Positive predictions for 2018

Not all the economist polled predicted a gloomy outlook for consumer finances, with 30 out of the 109 respondents claiming that the year will be easier for consumers.

Samuel Brittan told the newspaper that the year will be, “easier than one would think. The shock of Brexit is in the past.”

George Buckley, chief UK economist, Nomura Consumer said:

Spending growth should recover slowly after reaching a low point in the first half of 2018. Falling inflation and rising wage growth should be positive as should a pick-up in employment growth from spring next year after a slowing thanks to a weaker first half of 2017 growth outcome.

The graphic below shows responses to question: Will 2018 be an easier year for UK households?