Falling inflation sees consumer sector stirring

0
Have your say

THE UK’s consumer sector is showing “signs of life”, but the economy faces headwinds from the euro crisis, the squeeze on public spending and a fragile financial sector, according to leading economist Ian Stewart.

Speaking to the Yorkshire Post, Deloitte’s chief economist said that it is “good news” the UK is out of recession, but he stressed that while growth is set to continue next year, it is likely to be “weak”.

Gross domestic product (GDP) grew one per cent in the third quarter of the year, the Office for National Statistics (ONS) said in its preliminary estimates, ending three consecutive quarters of decline. City experts had expected a rise of 0.6 per cent. The actual figure is the biggest increase since the third quarter of 2007.

But the bounce-back was largely driven by one-off factors, the ONS warned, such as clawed-back activity lost to the extra bank holiday for the Queen’s Diamond Jubilee and a slight lift from the Olympics. These one-off factors are likely to have a “dampening effect” on figures for the next quarter, warned Mr Stewart.

He said: “The fact is that the outlook remains very uncertain. The economy is facing a combination of a recession in continental Europe, a still very fragile financial system at home and a government which is cutting spending.”

Mr Stewart, who is due to address a breakfast meeting in Leeds today where he will update experts from the financial and professional services sectors on the economic outlook, said the weakness of the consumer sector has had a “huge impact” on the UK economy and should not be underestimated. He said that one of the big reasons for this weakness in consumer spending is that inflation has been high.

“I think the really important thing is that growth in incomes has been running at between 1 and 2 per cent but inflation has been running way above that. People’s earnings haven’t been keeping pace with inflation. Their real spending power has been falling.”

Next year, Mr Stewart expects the squeeze on earning to ease as incomes are likely to rise “a little bit faster” than inflation.

He added: “What has changed in the last 12 months is that inflation has fallen sharply, it’s more than halved, and we are starting to see signs of life in the consumer sector.”

Yesterday, figures from the Bank of England showed that lending to British consumers rose in September, for the first time since June and at the fastest pace since February 2008.

Unsecured consumer credit rose £1.2bn in September, well above analysts’ forecasts, and including an increase of £307m in credit card borrowing.

Mr Stewart also said that although corporates are seeing “an uncertain world”, within an uncertain world there are still opportunities. “It isn’t just a matter of battening down hatches and waiting for things to get better.”

He stressed that historically, these times of economic change are where businesses find new opportunities, while distress in some sectors can create openings for other players.

Before joining Deloitte, Mr Stewart spent 12 years as chief economist for Europe at the US investment bank, Merrill Lynch in London. He previously worked as special adviser to the Secretary of State for Social Security, Tony Newton, as head of economics in the Conservative Party’s Research Department and as an economist with the CBI.

suzan.uzel@ypn.co.uk