U.K. Consumer Spending to Slow This Year, EY Item Club Says

(Bloomberg) -- U.K. households will tighten their belts even more this year as the impact of faster inflation and weak wage growth deepens.

Consumer spending will grow 1.3 percent this year, slipping further from a six-year low of 1.4 percent in 2017, EY Item Club said in a report on Monday. While price gains will slow over the next few years, pay increases are also set to remain modest.

The economy is struggling to overcome the effects of the decision to leave the European Union, which triggered currency-driven inflation and created uncertainty that has weighed on investment and wage growth. Spending growth has dropped from 2.9 percent in 2016 and the squeeze on consumers is hitting retailers hard, with Toys “R” Us Inc.’s U.K. unit and electronics chain Maplin collapsing into the British equivalent of bankruptcy protection last week.

“While the impact of higher inflation should slowly fade, the U.K. consumer will be hit by new issues which will impact their spending power,” said Mark Gregory, EY’s chief economist. “Our prediction of a ‘so-so’ consumer sector over the next few years points to a ‘so-so’ economy, growing at an unspectacular rate compared with past standards.”

EY Item Club expects the Bank of England to increase interest rates twice this year to keep a lid on prices. Higher borrowing costs will further damp household spending, which accounts for about 65 percent of gross domestic product.

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