British families are suffering the tightest squeeze on their finances since the depths of the recession, according to a new report.
Consumer research group Markit said its Household Finance Index recorded its lowest reading since March 2009, driven down by a combination of fears about job security, lower consumer spending and expectations of accelerating inflation.
As confidence drives down spending, which depresses the economy and then, in turn, knocks consumer confidence again, this cycle is clearly having an impact on the real economy; retail sales came in much lower than expected in May. They were down more than 1 per cent after the brief euphoria of the royal wedding boosted spending in April. What spending there has been, suggested Markit, has been fuelled by lower savings and a rise in debt, as income from employment declined. The Office for National Statistics this week said wage growth was only 2 per cent this year – less than half the 4.5 per cent rate of inflation.
June's survey indicated that 36 per cent of households saw their finances deteriorate since the previous month, six times as many as those that recorded an improvement. As a result, the headline Markit Index fell from 36.0 in May to 35.1 in June. This signalled the fastest deterioration of household finances since March 2009.
Looking forward, about 50 per cent of households expect their finances to worsen, while only 19 per cent anticipate an improvement. Respondents in the oldest age range, between 55 and 64 years, were particularly pessimistic. Public sector workers again signalled a steeper drop in job security than private sector employees. In recent days, senior Bank of England policymakers have confirmed that they think inflation will rise above 5 per cent later this year. Scottish Power recently announced increases of 10 to 15 per cent on gas and electricity tariffs, and the Government has signalled that there will be no let-up in its plans to cut the deficit and public spending.
Meanwhile, the shadow Chancellor, Ed Balls, has called for a temporary reduction in VAT to support the economy, a solution also advocated by the IMF and the National Institute for Economic and Social Research, although for them the economy is not yet weak enough to warrant such a move. Tim Moore, senior economist at Markit, said: "The survey suggests that it may be summertime but the living is far from easy. The decline in the index pours cold water on the tentative signs of improvement seen in the previous month." He added that the grim figures show household finances were deteriorating at the fastest pace since early 2009, "with people eroding their savings and taking on more debt to finance strong rises in living costs, as income from employment continued to fall in June".
The report adds to a growing weight of evidence that the "age of austerity" has barely begun at least in terms of the public's standard of living. This week the Governor of the Bank of England, Sir Mervyn King, made the biblical allusion that the nation was in the middle of "seven lean years".
Research from the UK Institute for Fiscal Studies found that households faced the biggest drop in real incomes for 30 years. They said that stagnant wages, increased taxes and high inflation cost the typical family more than £500 in lost real income over the past year. Some may have found themselves £1,000 worse off in real terms. The poor have suffered most from inflation in essentials such as food and energy costs and, apart from the very wealthy, have also lost most, proportionately, from tax and benefit reforms.
Markit say that income from employment meanwhile declined for the ninth consecutive month.Reuse content