Resilient consumer spending was the main reason why GDP growth held up so well in the wake of the Brexit vote. However, there have been signs that the exchange-rate induced rise in inflation is starting to hit real spending growth. Indeed, the expansion in household spending of 0.7% in Q4 was down from 0.9% in Q3. And the monthly fall in retail sales in January suggests that it has slowed further in Q1. The easing in spending growth appears to relate to higher inflation – which reached its highest rate since June 2014 in January – hitting real income growth. Indeed, squeezed consumer finances was cited as one of the factors behind the fall in the Markit/CIPS services PMI in February. Nonetheless, we think that rock-bottom interest rates and above-average consumer confidence should prevent household spending growth from slowing too sharply. Our forecast for spending growth in 2017 is 2.0%, down from the 3.1% outturn in 2016.
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