Consumer spending looks set to rise in 2006 giving a much needed shot in the arm for a flagging retail sector and boost to the UK economy as a whole, according to a recent report.

This month's Business Trends Report by accountancy firm BDO Stoy Hayward predicts stabilising house prices and cooling oil prices will ease inflation in 2006, which will in turn improve consumer optimism and therefore spending.

The report says that although consumer spending growth is unlikely to reach the highs of 2003 – which were largely fuelled by the house price boom – improved growth in the retail industry is likely, with spending set to exceed 2005 levels this year.

BDO forecasts that improving retail sales and easing inflation will lead to strong economic growth of around 3.0 per cent in the second quarter of 2006, well above currently anticipated predictions.

But it says the first quarter of 2006 is set for a slightly lower growth rate of 2%.  Indeed, the report's upbeat predictions come at a time when the retail industry is still waiting to see whether or not official December figures give grounds for optimism.

BDO also predicts that although the Monetary Policy Committee (MPC) of the Bank of England is unlikely to cut interest rates over the next few months, households can expect borrowing costs of 4.25% by the end of the year.

Chris Grove, partner at BDO Stoy Hayward said: “A strong combination of stabilising house prices and cooling oil prices suggest that consumer confidence will improve in 2006, paving the way for a retail recovery. Although we don’t expect the MPC to cut rates this month, it is likely that we will see a cut to 4.25 per cent by the end of the year which will put more money into people’s pockets and please UK businesses.”

Douglas McWilliams, Chief Executive of the Centre for Economics and Business Research added: “After a gloomy 2005, signs of improving business and consumer confidence will help bring a smile to the face of retailers and suggest stronger economic growth in 2006.”
 
BDO Stoy Hayward's report pools the results of all the main UK business surveys to come up with an overall average.