Families worse off as spending cuts hit home

Britons' household finances have continued to deteriorate during the past month, new research published today reveals, though some families may finally be seeing some positive signs.

Markit, the market research firm, said that more than a third of households had seen their financial position worsen during May – with 35 per cent of families complaining that they were now worse off compared with only 7 per cent reporting an improvement.

The research suggests families are continuing to feel the effects of tax rises and spending cuts, as well as inflation, which has accelerated to 4.5 per cent in recent weeks, though Markit said that May's deterioration was the least marked it had seen this year.

The market researcher also reported that some households are more optimistic about the months ahead, with mortgage borrowers, in particular, confident that they are unlikely to be hit with an interest rate increase any time soon. This may reflect the latest Bank of England Inflation Report, which economists interpreted as suggesting there would not be an interest rate increase before November.

Tim Moore, Markit's senior economist said there were some crumbs of comfort to take from the research. "May's survey showed a small but encouraging rebound in households' financial outlook, following a record low during April and declines throughout the first quarter of 2011," he said.

"Mortgage holders were much less downbeat than in April, possibly reflecting recent indications that the Bank of England will keep rates on hold for longer. Reduced job insecurity and a modest fall in inflation expectations from recent highs also contributed to the slightly less downbeat assessment of future household finances in May."

However, Mr Moore warned that the overall picture remained downbeat – and that there was little prospect of a consumer spending recovery to boost Britain's stalling economy. "While the slide in households' financial sentiment eased during May, the fundamentals for a consumer renaissance remain as elusive as ever," he said.

Markit's gloomy assessment was matched by a warning from think-tank Capital Economics that last week's upbeat retail sales data was likely to prove misleading. "The breakdown of the strong 1.1 per cent monthly rise in sales volumes in April suggested that this strength primarily reflected a temporary boost from better weather and the royal wedding," said managing director Roger Bootle. "The fall in Nationwide's consumer confidence index meant that it still points to falls in consumer spending. And the combination of the latest inflation and labour market figures showed the squeeze on households' real pay remains intense."

The Office for National Statistics is this week due to publish an updated estimate of the economy's performance during the first quarter of the year, with some economists expecting an upwards revision of the first assessment that GDP grew by 0.5 per cent.

But Mr Bootle warned against optimism. "The latest construction figures revised down the first quarter's fall only marginally, from 4.7 per cent to 4 per cent. So any upward revision in GDP is likely to be pretty small."