Consumer spending outlook darkens

The outlook for consumer spending is perhaps the gloomiest it has been since the darkest days of the recession. Consumer confidence dropped to near rock-bottom levels in July. It probably even fell further in August, driven down by the drop in equity prices and, perhaps, the recent social unrest. Unemployment has started to rise again at a rapid pace, while the squeeze on real pay will intensify in the autumn as inflation rises above 5%. We have therefore become increasingly confident in our well-below-consensus view that annual consumer spending will fall by around 1.5% this year and another 1% or so in 2012.