The first half of this year saw some green shoots emerging for consumer spending. Now, deep into the second half, it’s less consumer spending that’s growing, but more concern about significant tax rises. These may have consumers empathising with the fate of Shakespeare’s Ophelia, who was driven to despair and eventually drowned. But, let’s not get too despondent.

While economists are often accused of sitting alone in ivory towers when they talk about figures, down on the high street, activity did pick up in the first half of the year. Consumer spending accelerated to a little over 1.1% y/y in Q2. This was the fastest rate since early 2023 and the fifth consecutive quarterly acceleration in spending growth. It marks quite a turnaround from this time last year when spending was running at -1.3% y/y. What’s more, consumers seem to be willing to spend more on their wish list of non-essentials. Spending on clothing and footwear was up by 3.5% y/y and on hospitality by 3.1%, for example. This bucks the recent trend where the little consumer spending that did happen focused on essentials like housing and education.

However, the most recent data suggests that this rekindling of consumer spending has already been cancelled. On a quarterly basis, consumer spending grew by just 0.1% in Q2 and the saving ratio, which is the proportion of households’ income saved rather than spent, rose to 10.7%. For context, that’s up from less than 5% at the start of 2023 and above the pre-pandemic average of a little over 7%. What’s more, recent revisions to past data mean households' income and savings probably weren’t as strong as we first thought.

Stage set for household saving, not spending

There are probably many reasons why households have chosen to save significantly more over the past two years, but three prominent ones come to my mind.

First, higher interest rates encourage people to save more (or pay down debt) rather than spend. Indeed, the longstanding friendship between UK consumers and debt has been ruined. Since the end of the pandemic, households have made a concerted effort to pay off debt. We can see this in the households’ debt-GDP ratio dropping from about 98% in 2021 to 76% in Q2 2025.

Second, consumer confidence is weak. It averaged about -19 in the last year compared to about -6 in the five years before the pandemic. Clearly, households want to hold more rainy-day funds – what we economists call precautionary savings – and who can blame us given the last few years.

A story for the generations

If we dig a little deeper into the consumer confidence statistics, two things stand out. One, consumers feel much better about their personal circumstances than they do about the wider economy. This makes sense. Household real incomes have risen substantially over the last year or so and household balance sheets are in a good place. However, people are more worried about the future economy. People who are worried about losing their job in the future won't spend, even if their income has risen.

Two, older people have become much more pessimistic than younger people (explored in the first chart below). Returning to the reference in the headline, it’s like the powerful father figure is more troubled than Ophelia herself. This is a new phenomenon. Consumer confidence in different age groups at least used to trend in the same direction. The divergence started just after the general election. It seems political views are increasingly seeping into the survey data.

The third possible reason is that the pandemic and cost-of-living crisis gave us all matching scars and had such an impact on our collective psyche that we all just want to permanently hold a lot more savings than we did previously. We won’t know how truthful that one is for a while yet, though.

Act three: crisis resolution?

Looking ahead, as the Bank of England (BoE) likely cuts interest rates further and – knock on wood –consumer confidence improves as the rate of inflation comes back down, the saving rate should decline and consumer spending should rise. A drop in the saving rate to 10% over the next year, which would still be historically high, would be enough to push consumer spending growth to above 1.5% next year.

The big risk is that the Autumn Budget scuppers this outlook. Rachel Reeves has pledged never to break her vow on balancing the budget. Yet, speculation about future tax rises is already weighing on business sentiment and consumer confidence. Households worried about more taxes next year will probably opt to save more now.

In addition, we're anticipating tax raises of £25–30bn. Those will mainly fall on the household sector and will drag on income growth next year. It might mean that even if the saving ratio declines then consumer spending stays flat.

Finally, if those tax rises come in the form of inflation-boosting duty hikes and other measures, then inflation will stay higher and for longer. Not only will that drag on real income growth, but it will also prevent the BoE from cutting interest rates and keep the saving rate higher for longer.

While the recovery in consumer spending over the last year hasn’t exactly been an entrance worthy of a showgirl, we’ve seen some sparkle in consumer spending. However, the outlook is tougher over the next year. One of the biggest challenges the Chancellor faces in the Autumn Budget will be raising any extra revenue without crushing the fledgling signs of recovery.

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