Consumer spending has boosted the economy, but rising inflation could slow that down this year CREDIT: JOHN STILLWELL/PA WIRE
Surging share prices are making households wealthier, boosting confidence and offsetting some of the squeeze from rising inflation and sluggish wage growth.
Britons’ net financial wealth has jumped by 12.5pc in the past year according to economists at the EY Item Club – rising four times more quickly than wages.
This “should provide some prop to spending this year” and so keep the economy growing, they hope.
However, this only benefits the relatively well off who own shares and other financial assets. As a result rising inflation will hit lower-paid households the hardest.
7424.9600
Low earners also spend more of their income than high earners,meaning they receive a second bigger blow from rising prices.
Prices are expected to increase by 2.8pc this year, almost eclipsing pay growth and leaving household incomes rising by just 0.1pc in real terms over 2017, the Item Club believes, down from 1.8pc in 2016.
That inflation is driven in large part by the fall in the pound which is pushing up the cost of imported goods.
“Higher inflation will be the key culprit in the sharp slowdown in consumer spending growth this year, cutting off what has been an all-too-brief revival in real pay growth and continuing the dismal picture for real earnings seen since the financial crisis,” said Martin Beck, senior economic advisor to the EY Item Club.
“There should be some improvement in 2018, as inflation begins to cool, but even then we anticipate real wage growth of just 0.7pc. It is likely to be 2019 before workers begin to enjoy more ‘normal’ rates of real wage growth again.”
Inflation rose even more quickly back in 2011 with price rises peaking at more than 5pc, as high oil prices and VAT hikes pushed up living costs.
Economists do not expect this period of inflation to be that severe, and say consumer spending is “not heading for bust this year, [but] certainly faces the ingredients for a sharp slowdown”.
Other parts of the economy are more upbeat.
Executives at the world’s biggest financial services firms believe “the UK economy is on course for a resilient 2017, and could outperform other developed nations” according to a survey by Lloyds Bank.
Three-quarters of those surveyed said the UK’s economic growth will match or exceed the average in the G7 this year.
“Financial services firms are an important barometer of the UK economy – and despite uncertainties such as the future of our relationship with the EU and new regulatory pressures, they are confident that the outlook for the UK over the coming year is better than had been expected,” said Edward Thurman from Lloyds’ commercial banking arm.
Despite their confidence over the economic outlook those financiers still have some worries over the UK’s future relationship with the EU, however.
Almost two-thirds said they are concerned about the potential loss of the system of passporting which allows finance firms to do business across EU borders, while 50pc are concerned about barriers to trade and 35pc about the future of regulatory equivalence between the UK and the EU.
[“Source-telegraph”]
