Households stay cautious and reluctant to spend

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British households are pessimistic about their finances, reluctant to spend money and nervous that high levels of inflation are likely to further erode their spending power, according to new research published today.

The Markit Household Spending Survey shows that while there has been an increase in spending during the past few weeks, despite the wintry weather, many Britons remain reluctant to commit to big-ticket purchases and are wary about their economic future.

Markit said that 41 per cent of households said they had spent more money this month than in December last year, while 20 per cent said they were spending less. But while this will be welcomed by retailers, which are pinning their hopes on a pre-Christmas spending surge, it would appear that some households have had to take on borrowing in order to finance purchases, with a majority of families saying their spending power had fallen in recent months.

Markit warned this meant a pre-new year surge in retail sales was unlikely, despite the impending VAT rise in January. Households said they were particularly unlikely to make big purchases.

Nor does the outlook for 2011 look encouraging. Nine in 10 households expect the cost of living to rise next year, while a significant number continue to worry about job security. Nervousness about the year ahead is compounded by the fact that the majority of people foresee further house-price declines.

Tim Moore, an economist at Markit, said that most households did not feel they had yet put the recession behind them. "The UK economy looks to have avoided a double-dip recession in 2010, but there is little evidence that household finances have even begun to recover," he said. "People have seen their spending power gradually eroded by stubbornly high inflation throughout the year and little in the way of income growth to compensate for this."

Mr Moore said he expected households to remain cautious. "With the fiscal taps set to run cold in 2011, it's unsurprising that people are unwilling to make major purchases, even with the prospect of VAT rising to 20 per cent in January, and remain downbeat about the outlook for their finances.

"Regional disparities are likely to become increasingly evident as next year progresses, with areas that are reliant on the public sector likely to see the greatest pressure on their household finances."