Economic pain for households to go on, predicts adviser

In the latest issue of the Deloitte Economic Review, the firm’s economic adviser, Roger Bootle, warns that consumers are facing a period of pain and uncertainty.

Mr Bootle said: “A number of factors will maintain the downward pressure on household incomes in the near-term.

“For a start, pay growth is unlikely to catch up with inflation any time soon. Inflation is heading towards – and possibly above – 5 per cent. 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.”

Another cause for pessimism is the deepening fiscal squeeze, Mr Bootle added.

He continued: “Admittedly, there have recently been some not insignificant tax giveaways, including the rise in the personal income tax allowance. However, the net effect of this year’s direct tax changes will still be to reduce household incomes.

“Lastly, the labour market outlook provides further cause for concern. 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.

“The upshot is that I expect households’ disposable incomes to fall by about 2 per cent 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.

“Of course, real incomes do not provide the definitive picture as to the health of households’ finances.

“But taking a broader look at households’ finances arguably leaves the position looking even worse. I think that this year will see falling real earnings, falling real house prices and rising unemployment. In terms of the year-on-year change in circumstances, although not the absolute level, that would make 2011 the worst year for households since 1977, the depths of the recent recession aside. Were interest rates to rise too, conditions would arguably be the worst for households since 1952.”

Mr Bootle noted that some forecasters – such as the Office for Budget Responsibility – are optimistic about the ability of households to run down their saving to support their spending. However, the saving rate is historically low and, in the medium term at least, needs to rise, Mr Bootle observed.

He added: “Consumers may, therefore, have little choice but to cut their spending. I expect spending to drop by 1 per cent this year and by a further 0.5 per cent or so in 2012.”

However, Mr Bootle believes that inflation will fall sharply next year and will be below its target by the end of 2012.