In its latest outlook published today, the forecaster said that the budget heralded a big increase in taxes on households as well as a huge squeeze on welfare payments, which would lead to a drop in disposable incomes and, in turn, a fall in consumer spending.
As reported in The Times, Peter Spencer, chief economic adviser to the EY Item Club, said that while the introduction of the living wage “cushioned” the effects of withdrawing in-work benefits, it did not completely replace them, meaning that consumers would be worse off next year when the £12 billion in welfare cuts start to come into effect. While the living wage also comes into effect next April, it will start at £7.20 an hour and rise to £9 only by 2020, he noted.
While it forecasts that disposable incomes will increase by 3.5 per cent this year, it says that they will slow to 2.2 per cent in 2016. That will affect consumer spending, it predicts, saying it will be up by 3.2 per cent this year, but growth will slow to 2.2 per cent in 2016. The EY Item Club expects disposable incomes and spending to fall below 2 per cent in 2017 and to stay there for the next three years.
“UK consumers have been the boy racers in the fast lane, and consumer confidence is running at record levels,” Mr Spencer said. “While this heady pace is set to continue for the next few months, the boost from low inflation is likely to fade as we move into next year and the effects of the budget begin to weigh on household incomes.”
He said the only families to benefit from the living wage would be those that are already “well-off”, more particularly those with second earners in the household, where one partner works part-time and the other earns a high salary.
This assessment will be unwelcome news for the chancellor because the economic recovery has been largely consumer-led, and any slowdown in that could prove a drag on GDP growth.
In the summer budget, the Office for Budget Responsibility downgraded its growth forecast for this year to 2.4 per cent, from its 2.5 per cent prediction in March. It forecasts that growth will slip to 2.3 per cent in 2016, before returning to 2.4 per cent in 2017. In today’s forecast, the EY Item Club was optimistic about the country’s growth prospects and said it expected growth to reach 2.7 per cent this year and next, before slowing to 2.4 per cent in 2017 and 2018.
To counter the effects of a drop in consumer spending and to ensure a more balanced recovery, the forecasting group said businesses would need to step up their investment and export plans.
“Companies will have to invest in plant and skills to boost productivity and allow them to pay higher wages. However, we expect this strategy to be only partially successful, and we are likely to see growth and imports slow down as well.”
