'Double Burden' Puts The Squeeze On Consumers

Consumers are predicted to be the only driver of near-term growth according to an economic survey, as another report shows families are now £24 a quarter worse off than last year.

Ernst & Young's Item Club believes that recent trends of falling inflation and rising employment levels should boost consumer demand and help the UK grow by 1.2% next year, compared with a GDP decline of 0.2% this year.

But families are faced with the weakest rate of income increase since December 2010, according to a Lloyds TSB (LSE: LLOY.L - news) spending power report.

Item Club chief economic adviser Professor Peter Spencer said the UK is relying heavily on the high street to come to the rescue.

He added: "The fundamentals are in place to enable this to happen. Inflation is coming back to heel, private sector employment is holding up, and the housing market also looks poised for a revival.

"But it's not the balanced, long term sustainable growth we were hoping for."

The club's forecast is weaker than its earlier estimate of 1.6%, with its caution reflecting the weakening outlook in markets such as the United States, India (NYSE: IFN - news) and China, as well as the ongoing eurozone crisis.

Prof Spencer said net trade will subtract 0.6% from GDP this year, whereas disposable incomes are forecast to increase by 1.4% in 2013.

"There are though plenty of 'ifs' and 'buts'. The big question is the extent to which consumers will choose to grasp the opportunity or continue to de-leverage and to pay down their debts."

The report also says that the UK's growth spurt in the second half of the year is unlikely to be enough to enable the Government to meet the Office for Budget Responsibility's deficit forecast of £95bn for 2012/13.

The Office for National Statistics (ONS) also said that average household net income in the second quarter was £4,510, up 1.6% from Q1.

Stripping out inflation means that net income increased £69 from April to June, according to the ONS.

Meanwhile the Lloyds TSB September spending power report found that incomes grew by 1.7% annually, while spending on essential items grew at a faster rate of 3.3% year-on-year - leaving families £8 a month out of pocket.

It said spending on gas and electricity bills are up by 8% on a year ago - as households are set to come under further pressure after both British Gas and Npower announced price hikes last Friday.

Lloyds TSB's study comes after its research for August suggested pressure on consumer spending power might be easing after the Olympics and the wet summer weather may have produced some "volatility" to its August report.

Patrick Foley, chief economist at Lloyds TSB, said: "Despite the volatility in the data, it is clear that the underlying trend in real incomes is negative despite the fall in inflation from last year's high.

"I expect inflation to fall only slightly further over the coming months so any improvement in the situation will need to be driven by growth in incomes and this will depend on the wider economy.

"The pattern of consumers following rather than driving economic developments appears set to continue."