The outlook for consumer spending is not unambiguously gloomy – we think that the amount of income for discretionary (i.e. fun) spending has recently been growing at double digit annual rates. The key question, however, is whether consumers spend or save this income. And with further rises in unemployment and more falls in house prices yet to come, we think that households will save most of the extra cash. The weakness of the most recent retail sales indicators certainly suggests that this is what is happening. Of course, there may come a point where the rise in income is so big that some of it has to feed through into spending. For now, though, we continue to think that overall consumer spending will fall by around 3.5% in real terms this year and a further 1.5% next year.
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