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econoMAX - Still feeling the pinch?
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econoMAX - Still feeling the pinch?

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There have been many more headlines suggesting the UK’s economic recovery has begun to ‘take hold’, with recent quarterly GDP statistics showing a 0.8% increase, that heralds a full three quarters of …

There have been many more headlines suggesting the UK’s economic recovery has begun to ‘take hold’, with recent quarterly GDP statistics showing a 0.8% increase, that heralds a full three quarters of positive growth! However, it is difficult for the ordinary hard-working household to get too excited, as the purchasing power of their income continues to be well and truly squeezed.

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  • 1. Liz Veal Economax Editor October 2013 Still feeling the pinch? There have been many more headlines suggesting the UK’s economic recovery has begun to ‘take hold’, with recent quarterly GDP statistics showing a 0.8% increase, that heralds a full three quarters of positive growth! However, it is difficult for the ordinary hard-working household to get too excited, as the purchasing power of their income continues to be well and truly squeezed. The ONS’s recent Economic Review (November 2013) shows that real households’ disposable income, the real income after adjustment for direct taxes and benefits, has stayed stubbornly flat since the third quarter of 2009 – that’s for over four years. Meanwhile real GDP, though still not fully recovered to pre-recession levels, has grown by 4.2% over the same time period. The ONS points out that this discrepancy is not historically unusual at this stage of a recovery. While real GDP growth is, of course, welcome, if a long time coming, the average household is not yet feeling any significant benefits from it, except perhaps through rising employment. However it is clear that more of our disposable income is being spent on ‘essentials’, such as housing, water & sewerage, gas, electricity and petrol. The demand for these goods is said to be income-inelastic, that is, we do not really cut back on consumption when our incomes are squeezed. The ONS states that the proportion of income spent on essentials has risen from 19.9% in 2003 to 27.3% in 2013 – over a quarter of our incomes now goes on essentials compared to under a fifth just a decade ago. This means that, while disposable income may be unchanged, our discretionary income, income available to be spent on luxuries, treats and nonessentials, is falling. No wonder any increases in consumer confidence are ‘tentative’. It is usually spending on these non-essentials that makes us feel our standard of living in rising. Sharply increasing gas and electricity prices have been well-publicised in recent weeks. Over the last 10 years, the average price of goods and services has increased by just over 30%, while gas prices have risen 190.5% and electricity by 120.5%. Not surprisingly, the proportion of our disposable incomes spent on gas and electricity has risen from 1.8% to 3.1% between 2003 and 2013 despite there being a negligible change on the volume of household energy consumption. The further rises announced are a definite blow to households’ discretionary purchasing power.
  • 2. Liz Veal Economax Editor However perhaps there is hope that our real disposable incomes will pick up soon? Not so according to further ONS statistics. Real wages are back to their 2003 levels, having peaked in 2009. Average earnings are no higher than ten years ago. Inflation has eroded any wage increases and purchasing power has been eaten away. The fall in real wages has been a sustained one for over three consecutive years. So are consumers giving up hope? It seems not, as recent retail sales figures show a rise for 2013. Perhaps it will be a good Christmas for the shops? Consumers are using up savings, and the extra cash from the increase in the personal income tax allowance, to boost their consumption, so the signs of recovery do seem to have boosted confidence to an extent. However many economists are warning that the rise in discretionary spending on incomeelastic goods could ‘snap back’ if real wages continue to flatline. Consumers cannot dip into their savings indefinitely to enhance their discretionary incomes. Will the near-10% rise in energy bills prove significant in curbing discretionary spending? Expectations of higher future disposable and/or discretionary income is what consumers need and there is little sign of that at present for the ‘average UK household’, which continues to feel the pinch.