The resilience of consumers never ceases to surprise, with the strong spending seen at the end of December continuing into the start of January. This might suggest that consumers feel confident enough to spend the extra money that will be freed up by falling inflation over the next few months. However, we find it hard to see that happening. Unemployment, in our view, has another 1.5 million or so to rise over the next couple of years. Meanwhile, we now think that house prices could fall by a total of 40% to 45% from peak to trough, with only 15% to 20% of that adjustment already completed. And with credit conditions still tightening, many households will be unable to borrow as much money to spend. The recent more upbeat news has therefore done nothing to alter our view that consumer spending will fall by around 3.5% in real terms this year and a further 1.5% next year.
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