UK economy – is the Big Squeeze nearly over?

Published on 11 March 2014 0 comments

By John Hawksworth

Our latest UK Economic Outlook report suggests that we are now firmly on the road to recovery. Growth picked up from 0.3% in 2012 to 1.8% in 2013 and our analysis suggests that this should rise further to around 2.6% this year - although it might then ease slightly in 2015 as consumer spending growth moderates.

The services sector continues to lead the recovery, led by business services, retailing, hotels and restaurants. Manufacturing and construction have had a much bumpier ride in recent years, but at least growth is now positive in both these sectors, producing a more broad-based recovery.

All of this is good news, but our report also makes clear that businesses should not be complacent – there are still plenty of economic risks out there to be monitored and managed. Emerging markets have been volatile recently, and the current situation in Ukraine has added a new source of geopolitical uncertainty in recent weeks. The Eurozone crisis could also flare up again at some point.

Closer to home, UK productivity remains weak, which in turn has depressed real earnings levels. So consumers have reduced their savings ratio to fund extra spending during the past two years, which is not sustainable in the long run.  

At the same time, there are also now real upside possibilities associated with a virtuous circle of rising confidence and investment that could push UK growth up even faster than we project in our main scenario.

We therefore expect that the recovery will continue, but does this mean the end of the ‘Big Squeeze’ on household finances? Our analysis shows that cumulative price rises have totalled around 40% for the lowest income households over the past decade, compared to just 32% for the richest households. The poor have been squeezed more by rising food and energy prices in particular.

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Of course, inflation is only one of many influences on real incomes, but if we look at data from the Family Resources Survey on median incomes (i.e. for the household in the middle of the overall income distribution), then it does seem that there was a significant drop after the recession that is only now bottoming out. As the chart below shows, median real household incomes were an estimated 7% below their pre-crisis peak levels in 2013 and back below where they were in 2004.

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Looking ahead, however, we expect real incomes to recover gradually, supported by continued strong employment growth and increasing real state pension levels. But it will be 2020 before they are clearly back above pre-crisis peak levels after adjusting for inflation.

Overall, therefore, while the economy as a whole is now growing at a healthy pace, it may be some years before low and middle earners feel that the recession is really over for them.

John Hawksworth:
Read profile | Contact by email | Tel: 020 7213 1650


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