Households' disposable income fell for the first time in almost 30 years, official figures revealed today, overshadowing news that the economy shrank by less than previously thought.
Consumers' disposable income fell by 0.8% in the final quarter of 2010, the Office for National Statistics said, providing further evidence of the squeeze on consumer spending.
The first decline in spending power since 1981 came as wages failed to keep up with soaring inflation.
The ONS also revealed gross domestic product (GDP) fell 0.5% in the snow-hit final quarter of last year - a slight improvement on the 0.6% decline previously estimated.
The recovering manufacturing sector grew more than previously thought, the ONS said, while services and construction fell less than previously estimated.
The 0.5% reduction is still the biggest fall since the second quarter of 2009. The ONS said the reading would have been flat without the impact of December's Arctic weather conditions.
The ONS data showed the decline in household spending was worse than previous estimates in the fourth quarter - revised to a fall of 0.3% from a 0.1% drop.
Scott Corfe, an economist at the Centre for Economics and Business Research (CEBR), said the squeeze in consumer spending shows growth figures for the economy may be too optimistic despite being recently downgraded by the Office for Budget Responsibility.
He said: "The decline in real household disposable income seen in the final quarter of 2010 will almost certainly continue in the first quarter of 2011, as high consumer price inflation - now over double the Bank of England's target - erodes household spending power.
"Ultimately, this implies a very weak outlook for the consumer this year."
Export growth was also marked down from 2.3% to 1.7%, dealing a blow to the Government's efforts to rebalance the economy to be less reliant on imports.
The UK's current account deficit grew to £10.5 billion in the quarter, its highest level for a year and a half and worse than forecast by economists. This was up from £8.7 billion in the previous quarter.
Chris Williamson, chief economist at Markit, said: "The fourth quarter decline overstates the weakness in the economy, reflecting the bad weather at the end of last year, but is nevertheless still a dire reading compared to the UK's peers."
He added the prospects for the recovery were likely to be hampered by plunging consumer confidence as Government spending cuts start to bite.
Vicky Redwood, economist at Capital Economics, said: "Today's UK data suggested that there is still little evidence of a significant rebalancing in the economy.
"Indeed, we remain sceptical that the economy is now firmly back on the path to strong health."
Most economists are expecting a bounce-back in GDP figures during the first quarter of 2011, but it is unclear how strong the recovery will be or whether the rebound will be sustained.
Mr Williamson is forecasting growth of 0.5% between January and March, while Howard Archer, chief economist at IHS Global Insight, predicts a 0.7% increase in output.
The Treasury said today's figures proved the Government's plans were working and claimed that measures outlined in last week's Budget would help the economy grow.
A spokesman for the Treasury said: "This upward revision to growth continues to show the manufacturing sector performing well, which, supported by the actions announced in the Budget and the plan for growth, will help promote a rebalancing of the economy."
Today's figures are the third reading for the economy in the final quarter of 2010.
The initial reading from the ONS in January showed a 0.5% decline in GDP, but this figure was revised upwards to 0.6% last month before today's change back to its original estimate.Reuse content