Six years of tighter belts forecast as pay stagnates

CONSUMER spending will grow by a meagre 1.8 per cent between 2013 and 2018, as household incomes stagnate, according to a Centre for Economics and Business Research (CEBR) report released today.

Rising consumer spending before the financial crisis had helped to boost the economy, with a 10.4 per cent increase between 2002 and 2007. Since the downturn, expenditure has sunk by 7.1 per cent, wiping out much of the previous growth.

The average household’s real income has been pushed down by a 5.1 per cent since the onset of recession, as take-home pay is increasingly drained by inflation.

People are also now saving more of their wages, as uncertainty makes families more cautious about their financial situation. 6.9 per cent of the average salary is now saved, more than triple the pre-crisis level. When households decide to save more, it also reduces consumer spending.

The main author of the report, CEBR economist Daniel Solomon, commented on the findings: “consumption is expected to grow at a snail’s pace over the next six years meaning the British consumer cannot be relied to pull the economy up by its bootstraps. Retailers won’t be opening the champagne just yet”.

The Institute for Fiscal Studies (IFS) added that, because of the decline in median incomes, relative poverty has actually declined in recent years.

Since relative poverty is measured against the average income, if higher incomes fall faster than lower ones, fewer people are counted. However, IFS research also suggested that this reduction in inequality would have reversed by 2015, as the largest cuts to working-age welfare payments are still yet to be implemented.

Despite the fall in inequality, in 2011-12, the number of people considered to be in absolute poverty in the UK rose by one million.