Spending holding up as pay squeeze reaches its worst

There can be no question that consumer spending growth has suffered as nominal pay growth has lagged behind the ongoing currency-driven bout of higher inflation. But some of the slowdown in consumer spending growth should be reversed in Q3 as car sales rebound. Indeed, a large part of the slowdown in Q2 reflected a shift in car purchases from Q2 to Q1 to beat April’s rise in Vehicle Excise Duty. What’s more, higher inflation has not led to consumers tightening the purse strings. In fact, we have seen the reverse, with retail sales in cash terms up by around 4.5% on a year ago. Admittedly, after rising prices are taken into account, that only translates into volumes growth of a little under 2%. But inflation should start easing from October as the impact of the pound’s depreciation begins to fade, and surveys of salaries and difficulty recruiting new workers suggest that a simultaneous acceleration in wage growth is on the cards. As a result, we expect the pressure on household budgets, and in turn spending, to ease in the final months of the year and throughout 2018.