Consumers ‘running down savings’ to keep spending

Published on Tuesday, 25 February 2014 14:22
Written by Daniel Mason

The economic recovery has strengthened but is still too reliant on domestic demand – with consumers "running down their savings" to keep spending – the European Commission said today.

Publishing its regular winter forecast for all 28 countries, the commission said growth in the UK had become "more firmly established" in 2013 and the outlook was "stronger than it has been in recent years".

But it warned that weak export performance meant further growth was "likely to continue to come almost exclusively from domestic demand, with private consumption being the main contributor and investment playing a more important role as time progresses".

The commission predicted that UK GDP would expand 2.5% this year before slowing slightly to 2.4% in 2015. That compares with growth of 1.9% in 2013, about three quarters of which was a result of private consumption.

"Despite negative real wage growth, consumers are running down their savings in order to sustain their spending habits," according to the EU executive. "Robust employment rates are likely to be the reason for this behaviour.

"The expectation is that consumers will continue spending, though less vigorously than was seen at the end of 2013, as inflation falls and real wage growth turns positive towards the end of 2014 and into 2015."

If spending declines sizeably or the expected upturn in investment fails to materialise, the British economy could struggle, the commission warned. More positively, unemployment should continue falling, to 6.8% this year and 6.5% next, it predicted.

Olli Rehn, the European commissioner for economic and monetary affairs and the euro, said the recovery was "gaining ground" across the continent. Growth would be 2% across the EU and 1.8% in the eurozone this year, the forecast suggested.

"The worst of the crisis may now be behind us, but this is not an invitation to be complacent, as the recovery is still modest," Rehn said. "To make the recovery stronger and create more jobs, we need to stay the course of economic reform."

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