IEA warns over consumer spending

New data from Visa Europeshows that May had the strongest annual increase in consumer spending for more than two years.

Consumer spending increased last month by 1.3% on the year, up from 0.6% in April, the fastest year-on-year rise in household expenditure since October 2010.

Prof Philip Booth, Editorial Director at the Institute of Economic Affairs, said:

"Short-term fluctuations in consumer expenditure are not a good guide to the health of an economy.

“An economy where consumers are heavily indebted - such as the UK - will not resolve its problems through more consumer spending.

“Even if consumers were not heavily indebted, increased saving and reduced consumption might well bode well for the future.

“The economy needs to be unshackled from regulation and taxation so that it can best serve the needs of consumers in the long term. Ultimately, the economy's health is not best measured by short-term changes in consumption.”

Visa Europe’s UK Expenditure Index monitors eight broad sectors. Expenditure increased solidly in the Misc. Goods & Services category, which includes spending on personal care (e.g. hairdressing), personal effects (e.g. jewellery), and financial services (e.g. insurance premiums), and at Hotels and Restaurants. Spending also increased modestly in the Transport & Communication sector.

Spending decreased in five of the eight monitored categories during May. The strongest reduction was recorded in Health & Education, followed by Food, Beverages & Tobacco. Spending fell slightly in Clothing & Footwear, Household Goods and Recreation & Culture.

Chris Williamson, Chief Economist at Markit said:

“Consumers increased their spending in May, despite the coldest weather for 50 years hitting demand for seasonal items such as summer clothing and outdoor furniture.

“The data adds to the picture of an economy that is on the mend, but progress is frustratingly slow.”