Consumers surviving the squeeze

Consumers appear to be riding out the real pay squeeze well, supporting our view that spending growth will remain subdued, rather than collapse. And it shouldn’t be too long before the inflationary effect of sterling’s fall fades, putting consumer spending on a firmer footing. Admittedly, there has been little sign that net trade has been providing much of an offset to the consumer slowdown. But we still think that some boost should come through soon. Meanwhile, the Monetary Policy Committee (MPC) has given the clearest hint yet that Bank Rate will rise in November. If we are right in thinking that the economy will pick up from 1.6% this year to 2.2% in 2018 – outperforming the MPC’s expectations – then we envisage a further three interest rate hikes next year, taking its level to 1.25%. With rate rises reflecting stronger growth, rather than policymakers stamping on the brakes to snuff out inflationary pressures, this could be a positive sign that the economy is finally moving back to normality.