The week ahead: consumers are starting to have fun again

The final numbers for 2024 are in. The economy grew by 1.1% last year (that’s a little better than the 0.9% previously thought), but it stagnated at the end of 2024, when it grew by just 0.1% in Q4.

The most interesting part was the exceptionally strong growth in household incomes. Real household disposable income (RHDI), which is the best measure of households’ spending power, rose by a whopping 1.9% q/q in Q4. It means that households’ real incomes rose by 4.2% last year and are up by more than 7% since the pandemic. So, households, in aggregate at least, are in a strong financial position.

The problem is that they aren’t spending this rising income. While RHDI rose by 1.9% in Q4, consumer spending rose by just 0.1%. That means the saving ratio, which is the proportion of income households save, jumped to 12% – only a fraction below the 12.5% peak reached after the global financial crisis.

Spend returns to trend?

The good news is there are some signs consumers are starting to spend again. If you look at how spending has changed since the pandemic, then there is a clear increase in spending on necessities such as housing, health and education and a big drop in spending on “fun” activities like eating out and shopping.

However, if we look at more recent trends, spending on those “fun” activities looks to be returning, albeit slowly. There has been a noticeable upturn in the most recent data. Retail sales have risen strongly in the first two months of the year and business surveys are picking up again.

More reasons to be cheerful about consumer spending

There are two good reasons to expect the recent positive news in consumer spending to continue.

First, real incomes should continue to rise as strong wage growth and benefits outpace rising inflation.

Second, the saving rate is exceptionally high. It should gradually drop back as interest rates fall and consumer confidence ticks up. Excluding the pandemic, the saving rate has only been above 12% once in the last 30 years. It’s very unlikely to stay this high for long.

The combination of rising incomes and households spending a larger share of that income should push consumer spending higher. If recent trends are any indication, then consumers should start spending some of that higher income on leisure activities rather than just the basics.

Big risk is a global trade war

Of course, there’s much that could go wrong. The most obvious is a global trade war, which could knock consumer confidence back down, keep interest rates high and be a big drag on consumer spending growth.

But households are now in a relatively strong financial position and, barring another major shock, consumer spending should start to recover. Given consumer spending makes up about two-thirds of the UK economy, this should provide a decent tailwind for growth this year. 

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