There have been many more headlines suggesting the UK’s economic recovery has begun to ‘take hold’, with recent quarterly GDP statistics showing a 0.8% increase, that heralds a full three quarters of positive growth! However, it is difficult for the ordinary hard-working household to get too excited, as the purchasing power of their income continues to be well and truly squeezed.

1. Liz Veal Economax Editor
October 2013
Still feeling the pinch?
There have been many more headlines
suggesting the UK’s economic recovery has
begun to ‘take hold’, with recent quarterly
GDP statistics showing a 0.8% increase,
that heralds a full three quarters of positive
growth! However, it is difficult for the
ordinary hard-working household to get
too excited, as the purchasing power of
their income continues to be well and truly
squeezed.
The ONS’s recent Economic Review (November
2013) shows that real households’ disposable
income, the real income after adjustment for direct
taxes and benefits, has stayed stubbornly flat since
the third quarter of 2009 – that’s for over four years.
Meanwhile real GDP, though still not fully recovered
to pre-recession levels, has grown by 4.2% over the
same time period. The ONS points out that this
discrepancy is not historically unusual at this stage
of a recovery. While real GDP growth is, of course,
welcome, if a long time coming, the average
household is not yet feeling any significant benefits
from it, except perhaps through rising employment.
However it is clear that more of our disposable
income is being spent on ‘essentials’, such as housing,
water & sewerage, gas, electricity and petrol. The
demand for these goods is said to be income-inelastic,
that is, we do not really cut back on consumption
when our incomes are squeezed. The ONS states
that the proportion of income spent on essentials
has risen from 19.9% in 2003 to 27.3% in 2013 –
over a quarter of our incomes now goes on essentials
compared to under a fifth just a decade ago.
This means that, while disposable income may be
unchanged, our discretionary income, income
available to be spent on luxuries, treats and nonessentials, is falling. No wonder any increases in
consumer confidence are ‘tentative’. It is usually
spending on these non-essentials that makes us feel
our standard of living in rising. Sharply increasing gas
and electricity prices have been well-publicised in
recent weeks. Over the last 10 years, the average
price of goods and services has increased by just
over 30%, while gas prices have risen 190.5% and
electricity by 120.5%. Not surprisingly, the proportion
of our disposable incomes spent on gas and electricity
has risen from 1.8% to 3.1% between 2003 and
2013 despite there being a negligible change on
the volume of household energy consumption. The
further rises announced are a definite blow to
households’ discretionary purchasing power.

2. Liz Veal Economax Editor
However perhaps there is hope that our real disposable
incomes will pick up soon? Not so according to
further ONS statistics. Real wages are back to their
2003 levels, having peaked in 2009. Average
earnings are no higher than ten years ago. Inflation
has eroded any wage increases and purchasing
power has been eaten away. The fall in real wages
has been a sustained one for over three consecutive
years.
So are consumers giving up hope? It seems not, as
recent retail sales figures show a rise for 2013.
Perhaps it will be a good Christmas for the shops?
Consumers are using up savings, and the extra
cash from the increase in the personal income tax
allowance, to boost their consumption, so the signs
of recovery do seem to have boosted confidence to
an extent. However many economists are warning
that the rise in discretionary spending on incomeelastic goods could ‘snap back’ if real wages continue
to flatline. Consumers cannot dip into their savings
indefinitely to enhance their discretionary incomes.
Will the near-10% rise in energy bills prove significant
in curbing discretionary spending? Expectations of
higher future disposable and/or discretionary income
is what consumers need and there is little sign of
that at present for the ‘average UK household’, which
continues to feel the pinch.