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Consumer discretionary spending hits three-year high

3 min read

27 January 2015

The fall of inflation and an improving labour market are starting to put more money into consumers pockets, research shows. This could have a positive knock-on effect for SMEs.

Britain’s discretionary spending is at a three-year high, led by improved consumer confidence and pay rises.

According to the latest Deloitte Consumer Tracker, consumers’ confidence in their level of disposable income has remained stable for the third consecutive quarter and is nine points higher than for the same period in 2013.

In the final 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 per cent and 14 per cent respectively, vs. 13 per cent and 11 per cent in 2013).

Consumers’ finances have been boosted by the lowest rate of inflation in 14 years. Falling prices for food, energy and petrol, mean consumers are paying less for essentials, freeing more disposable income for discretionary and big ticket purchases, such as major household appliances and going out.

“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,” says Ben Perkins, head of consumer business research at Deloitte.

“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.”

Yet 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 per cent vs. -5 per cent in Q3 2014). This dip reflects weaker sentiment about health and wellbeing, and job security.

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 the UK General Election and uncertainty overseas, have dampened confidence.

“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,” adds Ian Stewart, Deloitte’s chief economist.