In its influential “green budget”, the IFS said a combination of strengthening earnings growth and low inflation will provide households “with a welcome improvement in their spending power”.
However, it warned it would be a gradual process.
It forecasts consumer spending will average 2.2% in 2014 and 2015, which is a “significant improvement” on recent years but well short of the 3.7% a year average over the decade prior to the financial crisis.
The report also predicted that the UK economic recovery will gain momentum this year.
Analysis for the IFS by Oxford Economics forecasts growth of 2.6% up from 1.9% in 2013.
Growth of 2.6% would leave the UK among the fastest growing developed economies, the report said.
Andrew Goodwin, senior economist at Oxford Economics said: “The UK recovery is getting ever closer to achieving ‘escape velocity’, although the unbalanced nature of the recovery to date emphasises the need to avoid complacency. Nevertheless, we believe that an improving global outlook will provide the basis for the recovery to broaden out this year, by supporting export growth and giving firms the confidence to invest their large cash piles.”
Elsewhere, the IFS predicted that housing activity would continue to accelerate, as the impact of the second phase of the government’s Help to Buy scheme filters through and household incomes and employment improve.
However, the IFS said there was little evidence that the housing market was overheating.
The report said: “Prices remain about 9% below their previous peak in nominal terms, and 25% below in real terms. Only in London have prices reached their previous nominal peak although they are still 17% lower in real terms.”
It said data currently available does not provide clear evidence of a housing bubble, even in London “though the likelihood of a bubble is greatest there”.
