Ongoing rises in unemployment combined with a continuing fall in real earnings and house prices will see UK households more squeezed than at any time since 1977, a report has warned.
According to the latest issue of Deloitte’s Economic Review, pay growth is unlikely to catch up with inflation any time soon as the latter continues to rise towards 5% – and may even exceed that figure this year. If such a scenario does occur, households will be harder hit than at any time since 1952.
As a result, Roger Bootle, the management consultancy’s economic adviser, believes that “real earnings are therefore all but certain to fall for the fourth successive year in a row – the first time that this has occurred since the 1870s”.
The situation will be compounded by the coalition government’s direct tax changes, the net effect of which will “still be to reduce household incomes” despite the rise in the personal income tax allowance.
Furthermore, the labour market outlook is also providing cause for concern, Bootle said. “I still doubt that the private sector can compensate for the cuts in public sector employment – which is already falling by 100,000 a year,” he warned.
The upshot of this scenario is that households’ disposable income will fall by about 2% this year in real terms – equivalent to about £780 per household. “And it will take until 2015 or so for incomes to get back to their 2009 peak,” Bootle said.
However, he expects inflation to fall sharply next year and to be below the Bank of England’s 2% target by the end of 2012, which will enable real incomes to start rising again.
The gloomy news was reinforced by jobs data from recruitment agency Reed after analysing job vacancies at 8,000 UK employers. It indicated that the number of private sector vacancies fell by 2% in April compared with the previous month, which was itself down on February.
The drop was mainly due to a fall in demand from the banking and tourism sectors, following strong growth earlier in the year. The sectors seeing the strongest rise in vacancies were IT and engineering, but salaries for new jobs overall were 1% lower than in December 2009, a figure that was unchanged from the previous month but one that meant pay packets were continuing to lag inflation.
Nonetheless, demand was still up 22% compared with a year ago, said Martin Warnes, managing director of reed.co.uk, and the fall in April was perhaps not surprising as “the Easter and Royal Wedding holidays led to a disjointed period for UK businesses”.
But he added: “Clearly business growth has been sustained at a higher level than the last quarter of 2010, but continued recovery remains difficult to predict.”
