A drop in inflation is set to end a five-year run of falling wages in real terms as salaries trailed behind the cost of living, forecasters predict.
Average wage growth of 1.8 per cent in the three months to October is still well behind November’s 2.7 per cent inflation rate, although economists expect the gap to narrow by the end of next year, bolstering spending power.
George Buckley, the chief UK economist at Deutsche Bank, said: “Consumers are in good shape to support a modest recovery in 2013.”
The Government’s official fiscal watchdog, the Office for Budget Responsibility, is predicting growth of 1.2 per cent next year – well below pre-recession rates, but the strongest since 2010. Although manufacturing and construction industries are struggling to achieve any growth, consumers will be in a stronger position as the pressure from the cost of living eases, Mr Buckley added.
“Look at inflation: it peaked at 5.2 per cent last year and finished last year at 4.2 per cent. This year it will be 2.7 per cent or thereabouts,” he said.
IHS Global Insight’s Howard Archer added: “Consumer price inflation is likely to be in a 2.5 to 3 per cent range through much of 2013, but will hopefully ease back in the final months.”
Other reasons for optimism include a recovery in consumer confidence to an 18-month high in November, as well as households beginning to address debt-laden balance sheets. Household debt to income ratios have fallen sharply from 175 per cent at the peak to 145 per cent, while interest payments as a share of income are also historically low at less than 6 per cent, according to Deutsche Bank.
Record low interest rates – expected to remain at 0.5 per cent next year – as well as central bank money-printing has also boosted share markets, despite a largely stagnant year for the housing market.
Economists have also been surprised by the gradually recovering jobs market on both sides of the Atlantic. According to the Office for National Statistics, UK employment hit a record 29.6 million in the quarter to October, although this may have been boosted by part-time workers as well as temporary staff working on the Olympics. In the US, payrolls data has been steadily improving, with the world’s biggest economy adding almost 150,000 jobs in November.