Wages are rising but will that filter through to an uptick in consumer spending?

“There are some signs that might be on the way, says Debapratim De, director of economic research at Deloitte. “We have a cautiously optimistic story,” he says.

Deloitte is forecasting a rise in consumer spending in the second half of the year, which is when they also expect overall economic growth to pickup. The forecast GDP growth figure they have for the year is 1.0%, a modest rise from the 0.8% seen in 2024.

One of the major drivers of this is the huge uplift in government spending planned for this year. Between 2010 and 2019, the average increase in the day-to-day budget has been £14bn. This year, the Office for Budgetary Responsibility expects it to be £49bn.

This is likely to have a net positive impact on employment and wages, says De. “It should show up in households’ financial conditions and in consumer demand relatively quickly.”

He also points to the consensus expectation that interest rates are in line for further cuts, which should make consumers more willing to spend.

The Deloitte forecast is more positive than the Bank of England’s own, which was revised down from 1.5% to 0.75% last week (albeit with a more positive outlook for growth in 2026 and 2027).

The National Institute of Economic and Social Research (NIESR) was a little more bullish, predicting that growth would still be 1.5%. Reuters’ consensus of economists for last month was 1.3%.

Household finances for consumers have been on an upward trend since 2023, with wage growth picking up last year and holding above inflation. Real wages increased by 2.5% for regular pay and 2.4% for total pay in September to November 2024 compared to the same period in 2023.

To put that in perspective (and to demonstrate just how high inflation has been over the last few years) that means real wages are now largely where they were in Spring 2021.

Will people splash the cash?

An increase is still an increase though and that new spending power has not found its way to consumer confidence levels yet. UK residents have also been reluctant to shift their balance from saving towards spending.

Bank of America UK economist Sonali Punhani pointed out this gap in a Global Research report  note released last week, saying “We think real wage growth, reduced drag from monetary policy and potential fall in savings rates should support spending.”

“Some of this is to do with consumers getting used to those higher price levels and I think we are closer to that point than we were last year,” says De.

PwC UK leader of industry for consumer markets Lisa Hooker wrote about the lingering “vibecession” for Retail Week earlier this week.

“As we move through the year, I expect to see a shift towards more positive economic indicators and increased consumer spending,” she wrote. Although she cautioned that the “landscape is likely to remain challenging.”

It is probably unwise to read too much into the January retail sales figures, especially when set against the mixed picture seen in December, but it should be cheering that growth was at its fastest level in two years. Growth was already at 1.2% last year, making the figures look more impressive.

Separate Barclays data had consumer spending up by 1.2% year-on-year for January. Pharmacy, health and beauty retailers had their best performance in three years as spending rose by 10.7%. The picture was not so rosy for clothing retailers and department stores though, with declines of 0.7% and 0.2% respectively.

One note of caution for the year ahead is the Bank of England’s forecast for inflation rising to a peak of 3.7% in the third quarter of the year before returning to its 2% target in 2027. This is because of an expectation of increasing energy prices, as well as higher food and good prices. NIESR believes the impact of these trends will be more modest, with inflation averaging 2.4% this year.

Still, if the bank is right, De says that higher inflation would have “an impact on consumer confidence, if not spending.”