Hard times (update)

According to a report just published by accountancy firm Deloitte, UK household real disposable incomes are set to fall for the fourth year in a row. What is to blame for this? According to Deloitte’s chief economic adviser, Roger Bootle, there are three main factors.

The first is the combination of tax rises and government expenditure cuts, which are now beginning to have a large impact. Part of this is the direct effect on consumer disposable incomes of higher taxes and reduced benefits. Part is the indirect effect on employment and wages of reduced public expenditure – both for public-sector employees and for those working for companies that supply the public sector.

The second is the rise in food, fuel and raw material prices, which have driven up the rate of inflation, thereby eroding real incomes. For most people, “pay growth is unlikely to catch up with inflation any time soon. Inflation is heading towards – and possibly above – 5%. Real earnings are therefore all but certain to fall for the fourth successive year in a row – the first time that this has occurred since the 1870s.”

The third is that demand in the private sector is unlikely to compensate for the fall in demand in the public sector. “I still doubt that the private sector can compensate for the cuts in public sector employment – which is already falling by 100,000 a year.

The upshot is that I expect households’ disposable incomes to fall by about 2% this year in real terms – equivalent to about £780 per household. And it will take until 2015 or so for incomes to get back to their 2009 peak.

… In terms of the year-on-year change in circumstances, although not the absolute level, that would make 2011 the worst year for households since 1977 (the depths of the recent recession aside). Were interest rates to rise too, conditions would arguably be the worst for households since 1952.”

Well, that’s a pretty gloomy forecast! The following articles examine the arguments and consider the likelihood of the forecasts coming true. They also look at the implications for monetary and fiscal policy.

Since I wrote the above, two more gloomy forecasts have been published: the first by the Institute for Fiscal Studies and the second by Ernst & Young’s Item Club. Both reports are linked to below.

Articles
Squeeze on incomes expected to rule out rate rise Guardian, Phillip Inman (3/5/11)
No rate rise until 2013, says Bootle MoneyMarketing, Steve Tolley (3/5/11)
UK households ‘face £780 drop in disposable incomes’ BBC News (3/5/11)
Why our purchasing power is set to suffer the biggest squeeze since 1870 The Telegraph, Ian Cowie (3/5/11)
2012 ‘worst year’ for household finances says Deloitte BBC News, Ian Stuart, Chief Economist with Deloitte (3/5/11)
Retailers expect sales gloom to continue Guardian, Graeme Wearden (3/5/11)
What makes consumers confident? BBC News, Shanaz Musafer (4/5/11)
Household incomes in UK ‘may return to 2004 levels’ BBC News (13/5/11)
Biggest squeeze on incomes since 1980s TotallyMoney, Michael Lloyd (13/5/11)
High street to endure decade of gloom, says Ernst & Young Item Club Guardian, Julia Kollewe (16/5/11)
Outlook for spending ‘bleak’ and road to recovery is long, Ernst & Young ITEM Club warns The Telegraph, James Hall (16/5/11)

Reports
Feeling the pinch: Overview Deloitte (3/5/11)
Feeling the pinch: Full Report Deloitte (3/5/11)
Long-term effects of recession on living standards yet to be felt IFS Press Release (13/5/11)
ITEM Club Spring 2011 forecast Ernst & Young
UK high street faces difficult decade as consumer squeeze intensifies and households focus on paying down debt, says ITEM Club Ernst & Young (16/5/11)

Data
Forecasts for Output, Prices and Jobs The Economist
Forecasts for the UK economy: a comparison of independent forecasts HM Treasury
Commodity Prices Index Mundi
Consumer Confidence Index Nationwide Building Society (Feb 2011)
Confidence indicators for EU countries Economic and Financial Affairs DG

Questions