'Feel good' start to year for consumers – but businesses remain nervy

UK shoppers have had a "feel good" start to the year and upped their spending by the fastest annual rate for nearly two years, helping to offset worries about the economy.

Data compiled by Visa, the UK's largest card payments processor, in association with research firm Markit show consumer spending rose 2.7 per cent in January compared to the same month the previous year. This is the fastest growth recorded since May 2014, according to Sky News.

As the UK is so driven by domestic demand, with the services sector accounting for 80 per cent of growth, the figures will be a welcome sign amid ongoing turmoil in the global economy. Last month, the forecaster Ernst & Young Item Club predicted economic expansion could surge to 2.6 per cent as consumer spending picks up this year, supported by net income gains from steady wage rises at a time of near-zero inflation.

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There was more good news in the data in the form of a 2.5 per cent boost in physical purchases, a big improvement from a Christmas period when the high street struggled amid a huge bounce in online shopping. Web-based buying still rose 4.6 per cent in January, but this was down from 7.3 per cent in December.

Clothing retailers did well across both formats, up five per cent as a cold-weather snap belatedly triggered demand for coats and knitwear.

Despite the increase in consumer spending, there are still a lot of nerves around regarding the prospects for economic growth. An aggregated survey published by accountants BDO says confidence among UK businesses is at its lowest level for three years, the Financial Times reports. The composite reading in the study has fallen to 100, meaning output for the next six months is expected to be in line with long-run averages.

It should be noted, however, that the index "suggests that output and employment continue to rise". Again, this reflects the domestic demand that to an extent insulates the UK from global headwinds – and comes as a separate index from Lloyds put business output growth in January at its fastest pace for six months.

The general view of the Bank of England and other official forecasters is that the UK will see growth in the coming years but at a slightly slower pace than previously, as manufacturing struggles and wage rises are constrained by persistently low inflation. Rate-setters are therefore holding off on interest rate rises as they wait to see how things play out.