Real earnings growth is forecast to be up just 0.1 per cent in 2017, slowing sharply from 1.8 per cent in 2016.
As a consequence consumer spending will rise by only 1.7 per cent, its weakest rate since 2013, according to the EY ITEM Club.
Last year saw a 12-year high of 3.1 per cent consumer spend growth, accounting for the entirety of the UK’s 1.8 per cent GDP growth. With lower consumer spending, the prospect of softer GDP growth this year looms on the horizon.
EY predicted spending will be hit by rising inflation following the devaluation of the pound, stagnation in the jobs market, and welfare cuts.
The report also forecast that consumer price inflation will rise steeply by 2.8 per cent this year, compared to growth of 1.8 per cent in the year to January 2017.
“Higher inflation will be the key culprit in the sharp slowdown in consumer spending growth this year,” said Martin Beck, senior economic adviser to the EY ITEM Club, who blamed inflation for cutting off a brief revival in real pay growth.
Lower income households are likely to be hit hardest, with increases in the prices of everyday purchases like food, energy and petrol, which account for 24 per cent of disposable income spending for poorer households but just 12 per cent for those on the highest incomes.
The UK employment rate may also become a victim of its own success, with EY predicting little scope for further growth and stagnation in 2017. Meanwhile the number of ‘frustrated workers’, meaning those who are unemployed but wish to work or would prefer a full-time job to their part-time employment, rose to 4.9m at the end of last year. These factors combined with potentially weaker GDP growth may negatively affect the employment rate in 2017.