'Last hurrah' before triple whammy
Household budgets to feel squeeze from 2017
However, lower earners and older workers are likely to be shielded from the worst effects, relative to other sections of the population.
The EY ITEM Club’s report on consumer spending expects a tightening of household incomes as growth slows from 3% this year to an average of 1.6% a year from 2017 to 2020.
This will have a knock on impact on growth in consumer spending – hitting retailers and transport sectors – which is also set to slow from 2.8% in 2016, to 1.9% a year between 2017 and 2020.
However, the National Living Wage (NLW) should provide a disproportionate boost to the spending power of lower earners.
Take-home pay for the bottom 20% of the income distribution will increase by an average of 3% a year from 2017-20, far higher than the median figure of 0.9%.
The elderly will also be better off. The number of workers aged 65 or over reached a record 1.2m in late-2015, almost double the figure in 2008.
The EY ITEM Club forecasts continued low annuity rates discouraging early retirement and legislated increases in the State Pension Age (SPA) helping to pushing up the number of older people in work.
These factors, combined with the generosity of the pensions “triple-lock”, will ensure that older people will be resilient to the broader slowdown.
Martin Beck, senior economic advisor to the EY ITEM Club, said: “From 2017, a number of factors ranging from a pick-up in inflation to cuts in welfare will create a ‘perfect storm’ which will hit household income growth hard.
“Low earners and older people will be spared from some of the drag, but the rest of the population will see growth in spending power slow sharply from the rates enjoyed recently.
“This slowdown will be particularly tough on the ‘squeezed middle’ who will bear the brunt of the impact and see growth in real take home pay slow significantly from 2.4% in 2015 to less than 1% by 2019.
“This will translate into softer growth in consumer spending, particularly on discretionary items which have been doing well over the past year.”
Transport, recreation and culture, and clothing and footwear will see growth weaken from 5.7%, 7.8% and 6.8% in 2016 to 0.8%, 5.1% and 2.5% respectively from 2017 to 2020.
Julie Carlyle, head of retail at EY UK and Ireland, said: “At first sight, the picture on consumer spending – especially discretionary spend – looks rosy for retailers for 2016.
“However, this will only be a rosy tint on what is a challenging time for retail businesses as the competitive landscape for every pound of consumer spending continues to intensify, indicated by the increased spending on health-related products and a continued strong spend on recreation and leisure.
“The ‘margin vice’ caused by deflation, discounting and the national living wage, coupled with the costs of delivering the seamless omni-channel service that consumers now expect, make these difficult times for retailers.
“To compete effectively, all retailers will need to engage with consumers not only on product but also on an experiential and emotional level. Retailers will also be focusing on the investment required in infrastructure, the most effective operating models and the use of data in smart and agile ways to allow them to be as savvy as consumers in their approach.”