The economic pressures on consumers are set to intensify this year. Most importantly, cracks are finally starting to show in the housing market. The credit crunch has made lenders far more picky about who they lend to, while the previous interest rate rises mean that many potential buyers had lost interest anyway. Significant house price falls are looking increasingly likely.
Not only will this reduce the amount of housing equity available for households to withdraw and spend, but consumer confidence will take a knock too. Household saving fell to a record low last year but with the housing market no longer doing people�s saving for them, I expect people to start to think twice before blowing their pay packets on the High Street.
Rising unemployment is likely to dampen the feel-good factor too, as weaker economic growth prompts firms to work harder to lower staff costs. And as if all that wasn't enough, the renewed rise in the oil price has meant that many consumers have started 2008 with the news that their gas and electricity prices will go up again.
On the bright side, the Monetary Policy Committee has already been quick to reduce interest rates, cutting them in December of last year. And more rate cuts are on the cards. But the Committee will be constrained in how quickly they can act by the likely prospect of inflation rising back significantly above its target over the next few months. And consumer spending takes up to a year to respond to interest rate cuts anyway. Accordingly, rate cuts will not stop consumer spending growth from weakening sharply this year.
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