Lloyds TSB forecasts UK economic recovery “very weak”

LONDON | Consumers’ discretionary spending in the UK continued to deteriorate in March, and after inflation fell 1.1% from a year earlier, reaching its lowest level since February 2011. This equates to £113 less a year to spend on non-essential items. In its latest Spending Power Report released Monday, Lloyds TSB said hopes for a pick-up in economic activity in 2012 will go unanswered as consumers feel biggest squeeze in spending power in the past 12 months.

A major factor behind this fall is weakening income growth, which slowed to 2.4% in March, compared to 3% in February. Income is now at its lowest rate since February 2011 and remains below inflation. At the same time, essential spending rose by 6.2% in the year to March, its highest rate since the series began. This was largely driven by an increase in food and drink, gas and electricity bills and spending on debt payments.

However, consumers also spent an extra 33% on vehicle fuel in the last week of the month compared to the week before in reaction to the threat of a fuel distribution strike, and overall spending on fuel in March rose by 12% compared to February.

Patrick Foley, chief economist at Lloyds TSB, noted that contrary to expectations at the start of the year, figures point out that the squeeze on consumers is not yet beginning to ease.

“Although overall inflation declined in the five months to March, prices of essentials are rising at an increasing rate, whilst at the same time growth in incomes has slowed.

“The pace of economic recovery is thus likely to remain very weak over the next few months at least, with subsequent improvement dependent on a stabilisation in living costs and impetus for growth from outside the consumer sector, particularly exports.”

The failure of a lower rate of inflation to noticeably feed through into consumer spending power is reflected in consumers’ attitudes towards the cost of essentials and everyday spending. Consumer research indicates that nearly three quarters of consumers or 73% have noticed the cost of essentials and everyday spending increasing, while just 19% believe costs have stayed the same or decreased as inflation begins to creep back towards the government’s 2% target following last year’s highs.

Looking ahead, an increase in fuel prices was cited as a source of inflationary concern among consumers in March, up by four percentage points to 70%. Three quarters of people remain concerned about the effects of inflation on gas and electricity prices; however, this is significantly lower than the high of 84% seen in July of last year.

Essential spending growth rose to 6.2% in March and this was largely driven by an increase in food and drink, which is up 7.5% from a year ago, as well as gas and electricity bills, which is up 11.2%. Of particular note is consumer spending on debt payments, which grew by 1.3% over the year to March. Following a series of monthly falls in this measure towards the end of 2011, it is now at its highest level since the series began.

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