Real private consumption expenditure

Over the five years through 2024-25, IBISWorld expects real private consumption expenditure will fall at a compound annual rate of 0.2% to £1.4 trillion. Despite a significant slump in 2020-21, caused by the global outbreak of the coronavirus, private consumption expenditure has generally trended upwards over the five-year period, in line with a then, strengthening economy. Prior to 2020-21, the United Kingdom's level of consumption expenditure recorded steady growth since 2013-14 as consumer confidence was restored and disposable income registered an overall increase. Record low interest rates throughout the period made borrowing cheaper and spending through unsecured borrowing has increased significantly. The low interest rates encouraged banks and financial institutions to offer attractive deals and attract new customers, which resulted in higher consumption expenditure. In contrast, prior to the five-year period, household expenditure was constrained and even contracted for two consecutive years through 2009-10.

Consumer confidence fell abruptly in the aftermath of the electoral decision to leave the European Union in June 2016, which resulted in a period of economic uncertainty. However, spending by households increased over the year, because of an increased access to credit as the cost of borrowing remained low. Although this rate of growth is not expected to be sustained, it contributed towards a relatively strong increase in private consumption expenditure over the year through 2016-17. While real private consumption expenditure expanded, weak wage growth, subdued economic activity and cautious consumers as a result of the United Kingdom preparing to leave the European Union weighed on consumer spending over the three years through 2019-20. Furthermore, as the UK's level of real private consumption expenditure was expanding during the initial stage of 2019-20, the global outbreak of the coronavirus is expected to have reduced this over the fourth quarter. Hence, real private consumption expenditure grew by 0.1% during 2019-20.

First identified in December 2019, in Wuhan, Hubei province China, the coronavirus outbreak disrupted supply chains, currency markets, stock markets, commodity markets, consumer demand and business activity. During 2020-21, real private consumption expenditure declined by a significant 12.1%, due to the uncertainty and reduced economic activity caused by the outbreak of the coronavirus. This trend is also consistent with significant falls in consumer confidence and real household disposable incomes during 2020-21 as a result of the outbreak of the coronavirus.

In response to the outbreak of the coronavirus, the Bank of England made an emergency cut to the official bank rate on 11 March 2020, from 0.75% to 0.25%, taking borrowing costs back down to the lowest level in history. Furthermore, just eight days later, on 19 March 2020, the BoE cut the official bank rate again, this time to a new record low of 0.1%, from 0.25%. In addition to this, the UK government has introduced a number of stimulatory measures intended to give a shot in the arm to the economy amidst prevalent disruption. For instance, Budget 2020, announced on 11 March 2020 by Chancellor Rishi Sunak, committed to the biggest rise in public borrowing for 30 years and an end to a decade of Conservative austerity, with public sector net investment set to rise from close to 2% of national income, to 3%.

While bank rates were cut, which typically reduces the cost of borrowing, incentivising an expansion in household spending and notable government support has been established, these measures were not enough to override the drastic damage set to be caused by the coronavirus. However, in 2021-22, the UK's level of real private consumption expenditure rose by 12%, due to the dissipation of the significantly damaging effects of the coronavirus such as nationwide lockdowns and stay at home measures. Furthermore, an expansion in real private consumption expenditure in 2021-22, was facilitated through the reopening of the domestic and global economy, which has been made possible through the reduction in severe coronavirus cases and deaths through the rollout of the COVID-19 vaccines. The Bank of England also agreed to keep the official bank rate of 0.1% in September 2021, maintaining the low cost of borrowing within the United Kingdom and thereby incentivising real private consumption expenditure in 2021-22.

Over, the current year, this trend is expected to continue with IBISWorld estimating that real private consumption expenditure will rise by 2.1% in 2022-23, to reach £1.4 trillion. This reduced rate of increase is due to an array of macroeconomic headwinds the UK economy is set to face over the current year. The UK economy is expected to contend with rising inflation, supply chain difficulties, energy price surges and dampened business confidence, exacerbated by Russia's invasion of Ukraine. For instance, the ONS announced in August 2022 that the UK's consumer price inflation had reached 10.1% in April 2022, surpassing the peaks of the early 1990s recession that consisted of sky-high interest rates and widespread mortgage defaults. Soaring energy bills being the biggest inflation driver of inflation. During the year, the Bank of England(BoE) has warned that inflation could hit 13% by the end of the year, with UK economy is now projected to enter recession from the fourth quarter of 2022. In response to rising inflation, the BoE raised the official bank rate to 0.25%, 0.5%, 0.75%, 1.25% and 1.75% respectively in December 2021, February 2022, March 2022, June 2022 and August 2022.