Investing.com -- UK consumer spending is set for a modest recovery in 2025, according to Bank of America (NYSE:BAC) analysts, as real income growth and reduced monetary drag support demand.
However, the balance between savings and spending remains uncertain, with inflationary pressures posing potential risks, says the bank.
BofA forecasts consumption growth of 1.0% in 2025, supported by 1.4% real income growth year-over-year.
"While inflation is expected to pick up in coming months, we expect wage growth (expected to slow to ~4% by H2 2025 and average 4.4% in 2025) to outpace inflation," the analysts noted.
However, they caution that rising savings rates have dampened the impact of real income gains on spending.
The report highlights that recent increases in savings have largely been used to reduce outstanding debt, driven by higher interest rates and concerns over mortgage payments.
However, with monetary easing and lower interest rates expected, BofA says the trend could reverse, boosting consumption. "A 1% fall in savings rate due to lower rates can imply consumption growth closer to 1.7%," BofA analysts projected.
On the downside, economic uncertainty, inflation, or rising unemployment could lead to even higher savings rates and stagnating consumption. If unemployment rises to 5% and policy uncertainty increases, BofA warns that savings rates could climb further, limiting household spending.
The bank adds that retail inflation has picked up since December, averaging 2.5% in January, with both apparel and food retail affected.
While grocery sales have shown resilience, supported by price-driven sales growth, BofA writes that apparel remains more vulnerable to changing consumer sentiment.
"The less discretionary nature of food retail could continue to drive stronger volumes than other categories like apparel if sentiment remains pressured," BofA analysts concluded.
