1. Consumer Prospects
The Prospects Service
January 2015

2. Consumer Prospects
January 2015
Contents
Executive summary 3 UK consumer spending 4 UK consumer confidence 9 Socio-economic analysis 10 Consumer credit outlook 11 Retail sales 12 Retail inflation outlook 13 Sector outlook 14 Online sales 20 Contact 21
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3. Consumer Prospects
January 2015
Households remain cautious about their financial situation but should begin to notice improvements to spending power in 2015
Volume growth in consumer spending in will be supported by low inflation and rising earnings growth.
The introduction of cost cutting measures suggests that intense retail competition will continue to put downward pressure on prices for much of However, ever tightening profit margins will limit price cuts beyond the end of this year.
Consumer confidence has started to fall back after rising strongly in 2013 and early However, it still remains relatively high compared with most of the post- financial crisis period.
Rising inflation, gradual increases in interest rates and public sector austerity are expected to bear down on consumer spending growth in 2016 and 2017.
Despite weak earnings growth, the UK enjoyed a relatively strong year for retail sales and consumer spending growth in 2014, supported by high levels of consumer confidence and rising employment. Alongside global economic fragility, consumer confidence has fallen in recent months. However, we expect 2015 to be another strong year for the consumer side of the UK economy. Two factors are likely to play a key role in supporting spending in First, as a result of large falls in global commodity prices and intense competition in the retail sector, headline inflation has fallen to historically low levels and is expected to remain weak through the next 12 months, with even some months of slight deflation. Secondly, we expect underemployment to fall sharply, boosting earnings growth as individuals move from part time/self employment into full time employment. In combination these factors should support the first sustained and significant increase in real earnings since the recession and provide a strong boost to households’ discretionary spending power. Whilst indicators suggest that consumers still believe that their financial situation is deteriorating, we expect that households will begin to recognise the impact of these factors on the availability of spare cash in the coming months. 3

4. Wage growth to pick-up but remain subdued
Consumer Prospects
January 2015
Wage growth to pick-up but remain subdued
Despite a strong labour market recovery, was a poor year for earnings growth. Annual growth in total pay (inc. bonuses), which averaged over 4% between , has not surpassed 2% in over 12 months.
However, wage growth has been on an upward trend since June and looks set to strengthen further in 2015.
Underemployment remains at relatively high levels but we expect this to fall back in the coming 12 months.
This will be one of the upward pressures on earnings in 2015, as employees shift from part- time to full-time employment and the involuntarily self-employed move back into salaried employment.
Still, the recovery in productivity required to support sustainable earnings growth remains elusive and with a weak inflationary environment, we expect that increases in wages will remain subdued compared with pre-crisis levels.
Average gross earnings (including bonuses), annual percentage change

5. Falling essentials prices free up income for discretionary purchases
Consumer Prospects
January 2015
Falling essentials prices free up income for discretionary purchases
The latest inflation statistics for December showed the UK economy edged further towards deflation. The consumer price index showed annual inflation of just 0.5%, the joint lowest rate on record.
We expect inflation to turn negative in the first quarter of However, this spell of deflation should be brief and a deflationary spiral is not currently a concern.
The main driver of the drop in inflation in the UK has been the falling prices of essential items. The average price of vehicle fuel fell by 10.5% in the 12 months to December and food by 1.7%. Notably these are not items which consumers can avoid purchasing because prices might be lower in a month’s time.
Deflation on these essential items should help to free up additional income from household budgets for discretionary purchases, boosting demand for such good and services.
Inflation of selected goods, annual change to December 2014

6. Consumer Prospects
January 2015
Low inflation to support growth in household incomes and boost consumer spending
Total real consumer spending and household disposable income, annual percentage growth
Real household incomes will be supported by a pick-up in earnings growth and headline inflation rates below 1% for much of the next 12 months, including a short spell of deflation in early 2015.
This will allow for a robust expansion of consumer spending in the short-term.
Rising inflation from 2016, coupled with gradual increases in interest rates and slowdown in employment growth will lead to a moderation in consumer spending growth in the outer years of our forecast horizon.

7. Sharp decline in the saving ratio expected to stabilise
Consumer Prospects
January 2015
Sharp decline in the saving ratio expected to stabilise
Household saving ratio, percentage
Revised ONS estimates of household saving paint a different portrait for how the saving ratio changed during and after the financial crisis.
The new estimates show that the saving ratio has fallen sharply since 2010, returning to levels witnessed prior to the economic downturn. Previous estimates suggested the ratio remained elevated compared with pre- crisis levels.
After falling in 2013 as consumer confidence rose sharply and households became less cautious, we expect the saving ratio to start to stabilise around 7%.

8. Consumer Prospects
January 2015
Spending power growing strongly thanks to triple effect of low inflation, employment and wage growth
In the last three months of 2014, household discretionary income, as measured by the Asda Income Tracker, experienced the largest year- on-year increases since 2009.
The combined effects of rapidly falling inflation, rising employment, and an upturn in wage growth have supported the considerable boost to household finances over the second half of
Key components of essential item inflation such as vehicle fuels and food have seen prices decline in the past 12 months; the average price of motor fuels has fallen 10.5%. As a result, Asda’s measure of essential item inflation stood at just 0.2% in December showing little upward pressure on the cost of living for UK households.
Year-on-year change household discretionary incomes, £
Source: Asda Income Tracker
Discretionary income refers to income net of taxes and after expenditure on essentials (such as food, rent and transportation) has been accounted for. 8

9. Consumer Prospects
January 2015
Consumer confidence remains relatively high but has seen a decline in recent months
YouGov/Cebr Consumer Confidence Index, 3 month rolling average
The latest data from the YouGov/Cebr Consumer Confidence Index, a composite indicator measuring consumer confidence, suggest that confidence declined for the third successive month in December.
Despite recent declines, consumer confidence remains higher than most of the period following the financial crisis and slightly up on the level at the beginning of 2014.
Within the survey there are clear signs that household earnings are beginning to pick up strongly.
However, the survey results indicate that most households still feel that their overall financial situation is deteriorating.
We expect that this will change as the financial demands of the holiday season wear off over the coming months and consumers begin to observe increases in the availability of spare cash.
Source: YouGov and Cebr
The YouGov/Cebr consumer confidence index covers historical data only. Higher values indicate higher levels of consumer confidence. Axis values of 94.9 represents the average Consumer Confidence measure since the data set began in 2007. 9

10. Retired households benefit greatly in post-financial crisis world
Consumer Prospects
January 2015
Retired households benefit greatly in post-financial crisis world
Index of household gross incomes (2003=100)
The pick-up in average earnings should support stronger income growth amongst working age households in employment beginning this year and continuing through to 2020.
Reforms to the welfare system in the current parliament have squeezed the incomes of households dependent on social security benefits, such as working age unemployed households. Further pressure on these groups can be expected over the next parliament, though the extent to which incomes are squeezed will depend on the result of the election in May.
With the State Pension “triple lock” uprating of earnings, inflation or 2.5% (whichever is greater), the incomes of pensioners will grow more strongly than other age groups over this time horizon.
Source: Office for National Statistics, Cebr analysis 10

11. Consumer credit growth to pick up further in 2015
Consumer Prospects
January 2015
Consumer credit growth to pick up further in 2015
Net unsecured credit grew by 5.8% in 2014, up from 3.6% in 2013.
This growth follows a period of decline from to 2012, when households paid off more unsecured credit than they took out in the aftermath of the financial crisis.
Rising consumer confidence encouraged consumer credit growth in 2013 and early before credit growth reached a post crisis highs of over 6% in the second half of 2014.
We expect increased household consumption to lead to a further expansion in credit growth, particularly through increased credit card purchases.
However, credit growth is expected to remain structurally weaker than in the period before the financial crisis, when double digit annual rates of expansion were common.
Slower spending growth and interest rate rises over will contain credit growth in the outer years of our forecast.
Net unsecured consumer credit: annual percentage change
Source: Bank of England, Cebr Analysis
Unsecured consumer credit is the total amount of sterling net unsecured lending to individuals (excluding the student loans company) 11

12. Consumer Prospects
January 2015
Largest annual fall in store prices in over a decade supports acceleration in retail volume growth
Retail sales: annual percentage change
Average store prices across the UK fell by 2.2% in the year to December 2014, the largest annual fall since June 2002.
A period of intense competition among retailers has brought about price deflation across the retail sector. Even with the effects of falling fuel prices removed, average store prices fell 1.5% between December 2013 – December 2014.
We expect continued retail price competition to bring down store prices further in 2015.
Despite the strong growth in 2014, sales volumes are expected to expand by a further 3% this year supported by the first sustained recovery in real wages since the financial crisis.
Source: Office for National Statistics, Cebr analysis 12

13. Fierce competition in the retail sector to dampen price growth
Consumer Prospects
January 2015
Fierce competition in the retail sector to dampen price growth
Food, which has provided upward pressure on the headline rate of inflation in recent years, is currently going through a spell of deflation.
The price of food and drink fell 1.7% in the 12 months to December 2014 driven by intense competition in the supermarket industry.
With stiff retail competition persisting and falls in the price of agricultural commodities such as corn and wheat, we expect food prices to fall further in the coming year.
However, with some of the big supermarkets already resorting to cost cutting measures, there appears to be little scope for profit margins to be squeezed for a more protracted period. We therefore expect food price inflation to return in
With wages rising in the developing world, the long period of falling clothing & footwear prices has come to an end. The continued increase in wage rates and pressure on the value of the pound against other currencies mean that steady inflation on clothing should continue in the next 5 years.
Annual price inflation rates for different retail goods
Source: Office for National Statistics, Cebr analysis 13

14. Consumer Prospects
January 2015
Spending growth in the clothing & footwear sector to continue to outperform other sectors over the next five years
Growth in annual consumer spending by category over , percent
Spending on clothing & footwear is expected to enjoy the strongest sector-specific growth over the period between , both in volume- and value- terms. We forecast overall sales volumes to rise by 41%.
Alcohol and tobacco consumption, on the other hand, is forecast to fall in volume terms over the period, reflecting high levels of taxation and health concerns.
Real (inflation-adjusted) spending on restaurants & hotels and food & non-alcoholic beverages is expected to rise by about 10% between 2015 and
Spending on household goods should grow at a slightly faster rate, with overall sales volumes rising by 13% between
Source: Office for National Statistics, Cebr analysis 14

15. Good year for restaurants as household discretionary incomes rise
Consumer Prospects
January 2015
Good year for restaurants as household discretionary incomes rise
The falling cost of essentials combined with faster wage growth, will support rising spending power for households through much of 2015.
Increases in discretionary incomes will help to bolster domestic demand for restaurants, cafes and bars as consumers have extra money to spend on luxury goods.
A combination of increased discretionary income, lower airfares and the weak euro could put pressure on domestic demand for hotels as households look to the continent for holiday destinations.
However, inbound tourism numbers are expected to be high this year supported by a strong dollar and the Rugby World Cup, hosted by England and Wales this Autumn.
In the outer years of our forecast horizon we expect spending to rise by a little over 1% per annum in volume terms and just under 4% per annum in value terms.
Total expenditure on restaurants and hotels: annual percentage change
Source: Office for National Statistics, Cebr analysis 15

16. Consumer Prospects
January 2015
Falling food prices have not yet translated into increased food consumption
Despite the falling cost of food and non- alcoholic beverages, the sector has struggled to achieve volume growth over the past year.
Purchasing trends, such as the decline in brand loyalty and growing trend for smaller, more frequent shops, highlight consumers desire to seek out additional value from their food shops.
Households, who still appear to feel under pressure financially, are using these savings to fund other forms of purchase as opposed to increasing food consumption.
We expect more significant volume growth to return in 2015, as households adjust to a sustained improvement in household finances and begin to increase discretionary food purchases.
However, margins in the food retail sector will remain squeezed in 2015, as price competition continues.
Total expenditure on food and non-alcoholic beverages: annual percentage change
Source: Office for National Statistics, Cebr analysis 16

17. Consumer Prospects
January 2015
Consumption of alcohol and tobacco to continue to decline over the next five years
With the exception of a very marginal rise in volume terms in 2010, consumers have been purchasing less alcohol and tobacco every year since 2004.
The decline can generally be attributed to a sharp fall in tobacco purchases, which have fallen 30% in volume terms since 2004.
With awareness of health issues increasing, we expect the overall downward trend in the consumption of alcohol and tobacco to continue.
Expenditure in value terms however is expected to continue growing at positive rates in spite of declining sales volumes, mainly due to the high taxes imposed on the consumption of such goods.
Total expenditure on alcohol & tobacco, annual percentage change
Source: Office for National Statistics, Cebr analysis 17

18. Clothing sales expected to perform strongly
Consumer Prospects
January 2015
Clothing sales expected to perform strongly
Total expenditure on clothing and footwear: annual percentage change
Clothing has seen volume growth throughout the financial crisis and the years that followed.
A combination of high street competition and increased family spending power will support a strong increase in clothing sales in with the largest annual increase in sales volumes since 2008 forecast.
However, we expect volume growth over the forecast horizon to be structurally weaker than before the financial crisis and conversely growth in value terms to be higher.
This reflects the fact that we expect faster price increases for clothing in the future, due to rising wages in the developing world (most notably in China). This higher price growth is expected to curb growth in clothing demand.
Source: Office for National Statistics, Cebr analysis 18

19. Slowdown in the housing market weighs on demand for household goods
Consumer Prospects
January 2015
Slowdown in the housing market weighs on demand for household goods
Household goods sales have recovered strongly in 2013 and 2014 as rising housing transactions and house prices have boosted demand.
Rising discretionary spending power across UK households over our forecasting period, and in in particular, will support growth in the sales of household goods in both volume and value terms.
However, despite the first sustained increases in real wages beginning to feed into household budgets, sales volume growth is expected to slow in 2015 as the UK housing market continues to cool and house prices moderate – we expect prices to fall by 0.6% across the UK next year.
More moderate discretionary income and house price growth in the outer years of our forecast will support volume growth of around 2% per annum.
Total expenditure on household goods: annual percentage change
Source: Office for National Statistics, Cebr analysis 19

20. Consumer Prospects
January 2015
Clothing and footwear retailers see the biggest rise in online spending in 2014
Internet retail sales as a % of total sales
The share of retail sales undertaken online has been on an upward trend over the past five years as more retailers have made it possible to purchase their goods online.
Annual average weekly spending online was £718.7 million in 2014, up 11.8% compared with 2013 and more than double the level five years ago.
The largest increase in 2014 was in online clothing and footwear sales, where spending rose by 17.2%.
The importance of internet sales to the UK retail sector is expected to continue to increase. Internet sales, currently representing over 11% of all retail sales, are forecast to build on this foothold in the market and increase their share of total sales to 17.4% by 2020, more than twice the share at the beginning of the decade.
Source: Office for National Statistics, Cebr analysis 20

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