Although every recession is different (for example in terms of length and magnitude), they do tend to have a few things in common. The focus of this blog is on consumer income and how it is affected in the aftermath of (or even during) a recession. According to data from the ONS, real national income per head has fallen by more than 13% since the start of 2008.

This latest data from the Office of National Statistics shows that in the aftermath of the 2008 recession, UK incomes have fallen by much more than they did in the 2 previous recessions experienced in the UK (click here for a PowerPoint of the chart). We would normally expect consumer incomes to fall during and possibly directly after a recession, as national output falls and confidence tends to be and remain low. However, the crucial thing to consider with falling consumer incomes is how it affects purchasing power. If my income is cut by 50%, but prices fall by 80%, then I’m actually better off in terms of my purchasing power.

The data from the ONS is all about purchasing power and shows how UK consumer incomes have fallen at the same time as inflation having been relatively high. It is the combination of these two variables that has been ‘eating into the value of the cash that people were earning’. Comparing the incomes in the four years after the 2008 recession with similar periods following the early 1980s and 1990s recession, the ONS has shown that this most recent recession had a much larger effect on consumer well-being. Part of this may be due to the rapid growth in incomes prior to the start of the credit crunch.

It’s not just the working population that has seen their incomes fall since 2008 – the retired population has also seen a decline in income and according to a report from the Institute for Fiscal Studies, it is the wealthiest portion of older households that have taken the largest hit since 2007. According to the IFS, the average person over 50 has experienced a fall in their gross wealth of about 10%, or close to £60,000. Of course for these older households, the concern is whether they will be able to make up this lost wealth before they retire. The concern for everyone is how long until incomes and purchasing power increase back to pre-crisis levels. The following articles consider this latest data on economic well-being and the impact the recession has had.

UK wellbeing still below financial crisis levels Guardian, Larry Elliott and Randeep Ramesh (23/10/12)
National income per head ‘down 13% in four years’ BBC Newsd (23/10/12)
Financial crisis hits UK retirement income Financial Times, Norma Cohen (23/10/12)
Over 50s ‘left £160,000 out of pocket by the financial crisis’ The Telegraph, James Kirkup (23/10/12)
Those near retirement in UK hit hard by crisis Wall Street Journal, Paul Hannon (23/10/12)
Living standards down 13pc since start of recession The Telegraph (23/10/12)

Twice a year, directly after the government’s Spring Budget and Autumn Statement, the Institute for Fiscal Studies gives its verdict on the performance of the economy and the government’s economic policies – past and planned. This year is no exception. After the Chancellor had delivered his Autumn Statement, the next day the IFS published its analysis. And what grim reading it makes.

• Real average (mean) incomes in 2011 will have fallen by 3%.
• Between 2009/10 and 2012/13, real median household incomes will have fallen by 7.4%
• Over the same period, real mean household income will have fallen by 4.7% – easily the biggest 3-year drop since records began in the mid 1950s.
• Real mean household incomes will be no higher in 2015/16 than in 2002/03.
• The poorest will be hardest hit by the measures announced in the Autumn Statement.
• Infrastructure spending of £4bn to £5bn will only go some way offsetting the effects of £17bn capital spending cuts over the Parliament.
• The economy will be 3.5% smaller in 2016 than thought in March.
• The structural budget deficit is 1.6% higher than thought in March.
• That will extend to 6 years the period over which total spending will have been cut year on year.

Referring to this last point, Paul Johnson, director of the IFS, said in his Opening Remarks, “One begins to run out of superlatives for describing quite how unprecedented that is. Certainly there has been no period like it in the UK in the last 60 years.” Referring to the fall in real incomes, he said, “Again we are running out of superlatives to describe just how extraordinary are some of these changes.”

Commentators have referred to the “lost decade” where the average Briton will not have seen an increase in real income.

Articles
Autumn Statement 2011: Families face ‘lost decade’ as spending power suffers biggest fall since 1950s, says IFS The Telegraph, Matthew Holehouse (30/11/11)
Autumn Statement 2011: IFS talks down George Osborne’s growth plan The Telegraph, Philip Aldrick (30/11/11)
Autumn statement study by IFS predicts lost decade for UK living standards Guardian, Katie Allen and Larry Elliott (30/11/11)
Britons Enduring 13-Year Squeeze on Living Standards, IFS Says Bloomberg Businessweek, Gonzalo Vina (30/11/11)
The UK now faces a ‘lost decade’ Financial Times, Martin Wolf (29/11/11)
Warning of seven-year squeeze Independent, James Tapsfield, Andrew Woodcock (30/11/11)
Osborne’s impact laid bare: The rich get richer and the poor get poorer Independent, Ben Chu, Oliver Wright (1/12/11)
Incomes to fall 7.4% in three years, says IFS BBC News (30/11/11)
No growth in income for 14 years, warns IFS BBC News, IFS director Paul Johnson (30/11/11)
UK economy: Third worst year since the war BBC Today Programme, IFS director Paul Johnson (29/11/11)

IFS Analysis
Autumn Statement 2011 and the OBR Economic and Fiscal Outlook IFS (30/11/11)