26 January 2010 | Published by Datamonitor

Consumer sentiment improves suggesting sustained growth

GDP expanded by 0.1% in the last quarter of 2009 ending the UK’s longest recorded recession.

The ONS released its preliminary estimate of UK Gross Domestic Product (GDP) growth today showing a return to growth for the economy. Based on its Recovery from Recession consumer survey, Datamonitor predicts that the economy will continue to grow in the next two quarters as consumer sentiment improves but that growth will be moderate rather than the strong rebound that some have predicted.

Government statistics released today show that the economy finally exited the UK’s longest recession on record with quarterly growth of 0.1% in the fourth quarter of 2009. Growth was due mainly to increases in distribution, hotels and restaurants as well as government and other services .This estimate, below the 0.4% that many analysts were predicting, shows that the economy has struggled to return to growth; though Datamonitor forecasts steady, if lacklustre, growth for the UK economy over the next couple of quarters based on the results of its rolling monthly consumer survey.

According to Datamonitor’s Recovery from Recessionconsumer poll, the number of consumers reporting that their finances are significantly or a little worse off than six months ago has dropped 7.5 percentage points from June to December 2009. Over the same period there has also been a marked improvement in consumers’ view of the economy with a 12.5 percentage point drop in those expressing a negative view of economic growth. This suggests that consumers have regained their footing and will be more confident in their spending, driving economic growth.

One important factor tempering this optimism will be the continued tight finances of many UK consumers; the same survey indicates that only 9.7% have experienced any improvement in their finances over the last six months. As such, it is unlikely that consumers will return to their free spending ways, splashing out on luxuries or big ticket items. Instead, Datamonitor sees consumers increasing their spending on the affordable luxuries of life such as premium grocery products or indeed returning to eating out at restaurant. As consumers have had to cut out so many of their expensive luxuries in recent months, they will increasingly be trying to make up for it with small treats that fit within their tight budgets. It is more likely that a consumer will treat themselves to a meal out at a restaurant than splash out on a new flat screen TV.

As a result, Datamonitor feels that consumer spending will grow in the coming months but that this growth will be modest, reflecting this trend towards small affordable luxuries. This will contribute to further, if slight, growth in UK GDP figures. As long as consumers remain constrained by their finances, significant growth in the UK economy will have to be generated from other sectors.

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