Consumer squeeze and splurge facing UK households

But there will be a growing disparity between higher and lower-income households with one likely to spend and the other facing the threat of “triple squeeze”.

Hoa Duong, economist at PwC said a strong labour market, combined with a large stock of excess savings, and a desire to move on from the pandemic could create the right recipe for household spending to propel growth. 

“More people have been going out to eat, going on holiday, and going to see their GP in person – and this normalisation of everyday activity is driving growth,” Mr Duong said.

“But the triple consumer splurge will likely be concentrated on higher income households, while lower income households could be hit by a triple consumer squeeze. There are three factors that have the potential to moderate this splurge, especially for lower income households. These households will feel the pinch from a combination of rising inflation, higher interest rates, and fiscal changes, especially the increase to national insurance contributions over 2022/23.”

According to the report the UK economy continued its recovery in Q3 2021 but economic polarisation is likely to see a return to sluggish levels of growth as consumer spending is squeezed in 2022/23.

Uneven recovery across sectors is expected to continue into next year, with growth in manufacturing impacted by ongoing supply disruptions and shortages while hospitality recovers in force post-lockdown.

Regional polarisation caused by the pandemic is significantly more severe than any previous economic downturns, especially those reliant on manufacturing, retail and wholesale, having a higher number of cases or an older population.

UK output in September 2021 was just 0.6 per cent lower than February 2020 levels due to a welcome acceleration in monthly growth. But sectoral data presents a stark picture of the uneven nature of the recovery, with the normalisation of everyday activity being the main driver of growth, according to the latest report. 

UK GDP growth is expected to remain strong in 2022, at around 4.5-5.1 per cent, but PwC economists cautioned that this is primarily driven by the impact of base effects as the fall in output during the national lockdown a year ago skews the annual figures. Core underlying growth is expected to be relatively modest, marking a return to a low-growth period until at least 2023. 

Jonathan Gillham, chief economist at PwC UK, said the economy is continuing to recover at a rapid rate, fuelled by the reopening of many sectors, but significant risks to recovery remain.

“There are already signs that this growth will become increasingly sluggish through 2022-3, as base effects fall out of the annual figures while consumers and sectors struggle with rising costs and supply chain bottlenecks,” he said.

“This polarisation of the economy will also be evident across sectors. For example, we expect sectors like manufacturing to experience slower growth next year of between 1 per cent and 2 per cent, while hospitality is expected to grow between 16 per cent and 20 per cent under our ‘limited’ and ‘accelerated growth’ scenarios.

“While many areas of the economy are returning to health and stability, this economic polarisation could create uneven effects and continue to act as a brake on growth in the medium term, even as some headwinds begin to clear.”    

Meanwhile, the report also found the short-term outlook for the labour market is cautiously optimistic. The emerging evidence points to a small overall impact of the end of the furlough scheme and the UK unemployment rate of 4.3 per cent in September was only 0.3 percentage points higher than it was pre-COVID. A record 3.2 per cent of workers also changed jobs in Q3 2021, which is a key sign of improving worker confidence, and there was 3.1 per cent growth in average earnings in real terms until September 2021.