'Light at the end of the tunnel' for consumers, says E&Y

A report by Ernst & Young's ITEM Club says the worst of the slump has passed and consumers will be better off this year and next.

by Michael Northcott
Last Updated: 19 Aug 2013

It’s fair to say we’ve had a few false starts from the brainboxes predicting where the economy is headed, but the latest prediction from Ernst & Young’s ITEM Club is that, as long as oil prices continue to ease, wages and inflation will soon align, precipitating a real-term increase in consumers' spending power. Further, the easing will trickle down to the high street and help it to enjoy a slow and steady recovery over the next two years. We reckon that oil prices caveat is a pretty big ‘if’…

The report predicts inflation will move back to the government’s target of 2% by the end of the year, meaning wages will no longer suffer erosion because of the currency devaluation. In addition, changes to the personal tax system will ‘bolster the wallet of the average earner’ by £482 this year and £624 in 2013. 

Don’t expect people to take to the high street in their droves to blow it all, however. The report also points to the massive debt-to-income ratio still afflicting the UK’s economy. The ratio was 151% at the end of 2011, down from the 2008 high of 173%. While any reduction is welcome, the UK’s ratio remains a lot higher than the US’s 117%. Making matters worse, the cost of servicing debts will most likely rise as interest rates start to climb from their current record low. Better not rush out and buy an iPad then…

The prospect of a recovery like this hinges on a few volatile variables, making it hard to know whether the folks at E&Y have got it right. The rising cost of servicing debts, and the possibility that oil prices will climb again (and push inflation back up) are key factors. As the ITEM Club’s senior economic advisor, Andrew Goodwin, says: ‘The eurozone crisis continues to cast a long shadow and consumer confidence could easily take another hit if the situation worsens, particularly if unemployment nudges up.’ 

For anyone out there who jumped for joy at E&Y’s report, we don’t recommend holding your breath…

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