Britain’s discretionary spending records a three-year high

Falling inflation and an improving labour market are starting to put more money in consumers’ pockets, indicates Deloitte Consumer Tracker. Two factors are underpinning consumers’ confidence in their level of disposable income, which remains stable for the third consecutive quarter (-18%), and is nine points higher than for the same period in 2013. In the fourth quarter of 2014, fewer people suffered a reduction or a loss of income, and more said they had received a pay rise or bonus than a year ago (11% and 14%, respectively, vs. 13% and 11% in 2013).

Consumers’ finances have been boosted by the lowest rate of inflation in 14 years. Falling prices for food, energy and petrol, imply consumers are paying less for essentials (9% spending more vs. 15% in Q4 2013), freeing more disposable income for discretionary and big ticket purchases such as major household appliances (-3% vs. -5% in Q4 2013) and going out (-9% vs. -15% in Q4 2013).

“Lower inflation and higher wages are having a pronounced effect on consumer spending behaviours. Categories such as hotels and restaurants or consumer technology have really benefited from consumers feeling less of a squeeze on their disposable income. In comparison, net spending on utilities and groceries is growing more slowly than consumer spending overall, a reflection of falling fuel prices at the pump and the grocery sector’s intense price competitions,” shares Ben Perkins, head of consumer business research at Deloitte.

However, while the long-term trend in consumer confidence is up, short-term uncertainties have emerged. In the fourth quarter of 2014, overall consumer confidence fell three points compared with the previous quarter (-8% vs. -5% in Q3 2014). This dip reflects weaker sentiment about health and wellbeing and job security.

“Although consumers have turned more positive on prospects for incomes in the last year, continued uncertainties seem to be affecting their wider perceptions of their welfare. This appears to echo the finding of Deloitte’s latest survey of Chief Financial Officers (CFOs), which shows that while CFOs are upbeat on the UK economy, external factors such as the UK General Election and uncertainty overseas, have dampened confidence,” reveals Ian Stewart, chief economist at Deloitte.

“For the UK consumer the sort of transient deflation caused by lower oil and other commodity prices will be a significant positive in 2015. Growth in real wages is set to accelerate further. Chief Financial Officers report that they expect employee earnings in their businesses to rise significantly faster than inflation this year. This recovery in disposable incomes points to a further acceleration in the growth of UK consumer spending in 2015, with discretionary categories likely to do especially well.”