The main economic ‘downside risk’ over the coming months is likely to be the consumer and consumption figures. With wage growth over the previous 18 months so muted and inflation over the same period climbing, real spending power has been stifled. The result has been consumer spending that has slowly declined since mid-2016 – this includes high street spending, car sales and of course, housing transactions.
Consumption accounts for two-thirds of the UK economy so this is a major contributor to how well, or not well, an economy grows. Consensus forecasts expect that 2018 will continue to see muted consumer spending at just 1.2% annually (compare this to rates of 2%-4% between 2013 and 2016).
On a more positive note, most analysts expect that wage growth will increase this year as the race to retain talent intensifies, and with the exchange rate differential now filtering out of inflation data, this should dissipate too. The question going forward then is if real incomes rise, will the consumer decide to spend or save? This could be one of the biggest factors in whether the UK economy surges or stutters through 2018. On the other hand, manufacturing data has been better than expected through the latter half of 2017 and early signs for 2018 look encouraging too. The manufacturers’ organisation EEF has upgraded its manufacturing growth outlook to 2% this year, while the CBI recently announced that business growth reached a two year high in February. Could it be then, that 2018’s economic stimulus is provided by the corporates, rather than the consumer, or both?
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