The forecasting body has published a special report saying consumer spending will grow by 1.2% this year, as basic rate taxpayers take home nearly £300 extra this year due to increases in the income tax personal allowance. Next year taxpayers will receive an average £140 extra each.
The ITEM Club says this increase, together with a recovering housing market and a strengthening economy, will see consumer spending continue to grow next year, and predicts levels will reach 1.9% in 2014.
However it will be 2015 before levels reach around 2.2%, back to those levels seen before the financial crash.
Beyond that, the group of economists predicts growth will reach 2.6% a year until 2010.
The government has has been gradually increasing the personal allowance over the last few years, which is set to increase to £9,440 for the 2013/14 tax year and £10,000 thereafter.
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said, “The high street revival is gathering momentum. A happy coincidence of converging factors, supported by government policies around income tax and the housing market, will lead to the revival of consumer spending over the next three years.
“The Treasury’s plan to move from an economy dependent on consumption to one led by exports and business investment has been put on hold. The UK has essentially returned to relying on the consumer to drive economic growth.”
However, Spencer warns that despite showing strong signs of life, consumers have been bruised by the experience of several tough years and will remain nervous and cautious in their spending habits. “Any hint of adverse economic developments is likely to provoke an immediate blip in spending and a retreat from the local restaurant back to meal deals and nights on the sofa,” he said.
Following what the body calls a “dismal five years” for the High Street, shoppers are expected to start splashing out on TVs, tablets, smart phones and package holidays. The ITEM Club says this means the recreation and culture sector is expected to grow by 5.9% this year.
Julie Carlyle, head of UK retail at E&Y, said, “While a return to sustained growth in consumer spending is good news for the high street, a closer look at the figures reveals an underlying story for the evolving retail sector. There is an increasing battle from retail and leisure activities for our pound spend in the coming years and this will add to the transformation of the high street.
“The challenge for retailers is to remain relevant and to come up with a proposition that will attract spending. Speed in responding to changing trends and the right use of data to gain insights into consumer habits will help retailers to adapt and stay ahead of their game.”
The group sounded a few other notes of caution, warning that jobs growth would only be around half of last year's, and warns that economic growth will be held back by lower growth in social benefits. These elements contribute to growth in real household disposable income of only 1.2% in 2013 and 1.0% in 2014.
“These rates are well short of historical norms,” said Spencer. “Over the twenty years prior to the financial crisis, for example, household disposable income growth averaged at 3.5% a year. However, they nevertheless represent a step up in performance since the beginning of the global financial crisis and should still manage to sustain the recovery in consumer spending.
“Although the tills will continue to ring, retailers shouldn’t expect to see their customers spend as freely as they did prior to the recession.”