Consumer Spending Boost to Lift UK Growth

Prospects of a consumer spending revival has led to one of the UK's leading economic forecasters to revise up its growth estimates for both 2013 and 2014.

The National Institute for Economic and Social Research (NIESR) predicts that the UK economy will grow by 1.2% in 2013 and 1.8% in 2014, both 0.3% higher than previously forecast.

"The main cause of the improvement in the economic growth outlook is a rise in the prospects for consumer spending growth," said the NIESR, though it added that it is "at the expense of household saving, rather than a consequence of rising real disposable incomes".

Consumers have been hit by a cocktail of underemployment, a stinging real-terms fall in pay and a rise in the cost of living. The Joseph Rowntree Foundation (JRF) calculates that the basic cost of living has risen 45% over a decade.

Household savings plunged to a five year low in the first quarter of 2013, according to official figures, as Britons have less disposable income to put away and many are deterred by low interest rates.

NIESR said one of the risks to its forecast growth in the UK is a rise in interest rates, which would encourage more people to save rather than spend.

"In any case, while consumer spending growth is a necessary component of any recovery in the UK economy, a balanced recovery will require a significant contribution from net trade and gross fixed capital formation," said NIESR's report.

"We see relatively little sign of this as yet, with the current account deficit larger than in the decade before the onset of the Great Recession, and business investment volumes, remaining below 2007 levels until after 2017.

"An unbalanced recovery driven primarily by consumer spending (especially if accompanied by rising house prices) is worrying from a long-term perspective."

Accelerating growth not enough

Growth has accelerated in the first six months of 2013. Office for National Statistics (ONS) data shows GDP expanding 0.3% in the opening quarter, before picking up to 0.6% growth in the three months to June as output rallies in the private services sector.

"The gradual gain in economic momentum is not enough to close the large negative output gap or reduce unemployment significantly," said the NIESR.

"With unemployment high and no evidence of upward pressure on real wages there is still considerable spare capacity. Underemployment measures suggest that there is even more slack in the labour market than the headline unemployment rate suggests.

"In such an environment an acceleration in demand growth should be possible without stimulating inflationary pressures. As we have repeatedly argued, policy measures to boost investment, both public and private, would benefit the economy in both the short and long term."

The International Monetary Fund (IMF), while backing the general austerity programme of public spending cuts to erase the Treasury structural deficit, urged Chancellor George Osborne to bring forward planned capital investment in infrastructure to provide a fillip to the economy.

Treasury Chief Secretary Danny Alexander has already outlined a £300bn infrastructure investment programme for the coming decade, but none of this is extra government cash to be invested. Much of it has been reallocated from other public budgets and projects are not due to start for a number of years.