/ Money

Is the squeeze on living standards over? (Spoiler: yes, but no)

House being squeezed

There’s been much speculation that the squeeze on living standards is over, but digging below the headline figures shows policy makers still face significant challenges in ensuring living standards rise.

Recent data show wage growth matching inflation for the first time since 2010 and a raft of recent data releases suggest that, in line with official forecasts, this could be the start of a longer-term trend of rising real incomes.

Recent highlights include that: the UK economy grew by a better-than-expected 0.8% in the three months to March (leaving overall GDP just a tad below its pre-recession peak); indicators of activity and business confidence in key sectors like manufacturing and servicespoint to strong figures for future GDP data releases; and unemployment continues to tumble faster than expectations.

The importance of consumers in driving these positive figures is clear, with the last few months seeing a notable increase in consumer spending (both in terms of volume and value).

Consumers’ confidence is also returning. In April, our consumer insight polling showed that, for the first time since our tracking began, more people are positive about prospects for their personal finances than are negative. Consumers are even more positive about the prospects for the UK economy, with the net positive balance having increased for the last nine months.

Actual spending is also on the up, and, most notably, the Which? insight tracker shows people are more confident to spend on discretionary items as fewer cut back on non-essentials like entertainment and big ticket items.

Graphic showing what people are cutting back on

But we’re not out of the woods yet

Increased spending, confidence and confidence in the future all bodes well for the future. But let’s not get too excited. It is clear that beneath these headlines, many consumers are still struggling. For instance, positivity over prospects for future personal finances varies significantly across the UK. Londoners and people in the West Midlands are much more likely to feel positive about their future finances than those in the North West or in Wales.

Some groups are also faring better than others. Our data shows men are more likely than women to be feeling positive about their financial situation and higher income households are also much more optimistic than those on lower incomes.

As well as these divergent experiences of the improved economy, it is also clear that in practice, the living standards challenge was always about more than just recessionary pressure on prices and incomes. Our research using the ONS’ Living Costs and Food survey also shows that consumers are facing pressures that are much longer-term than the financial crisis, with essential spending taking up more and more of consumer budgets over the last ten years. There are also more pressures to come, with hundreds of billions of pounds of infrastructure investment and policy decisions (for instance over energy efficiency) being pushed through onto consumer bills.

With this context it is unsurprising that three in 10 consumers still tell us that they are finding it difficult to live on their incomes and over 70% of consumers say that they are worried about energy and fuel prices.

The challenges that lie ahead

Overall, there is no doubt that recent good news on growth, earnings and inflation should be warmly welcomed. But looking at the longer-term trends and how consumers are feeling shows that the squeeze on households’ finances is very much still alive. It’s just not the same squeeze that has been talked about in public debate.

Going forward, future governments will continue to be judged on whether they preside over a rise in living standards during their time in power. To do this, ambitious policy responses will be needed to help consumers tackle the challenges that lie ahead.

The living standards squeeze is over. Well, sort of, but not really.

This piece by Matthew Oakley was originally published on The Huffington Post.

Comments
Profile photo of malcolm r
Member

I am relieved that after a near economic disaster we are gradually seeing a sustained improvement. We will never know whether the austerity policy was essential to produce this, because we cannot see what the alternative borrow-and-spend would have achieved – but whether right or not we are recovering. It has to be gradual – improvement in employment, confidence, making the public sector more efficient, investing in the private sector, reducing borrowing does not happen overnight. I just hope we don’t let ambitious politicians of whatever party disrupt this with populist measures at the next election.
Why focus just on energy and fuel? Most of us spend much more on food and housing – unfortunately prices are all affected by increasing demand. How do you change that (please, not by government price controls – that never worked because they weren’t clever enough, and still aren’t).

Profile photo of John Ward
Member

I think this is a very good analysis and I think the “Yes but but No” conclusion is valid. A few random thoughts –

Due to constant repetition it would be easy to suppose that there is a “cost of living crisis” affecting the whole country but the reality varies considerably from place to place and across different sectors of the population.

When the needle on the misery meter swings into “getting better” territory it can be a powerful driver of confidence but also a true test of a good society if it doesn’t carry with it those struggling on the downside of the line.

With tax and benefit changes the government is addressing “hard-working people” but it is presiding over a labour force that has never been more part-time or self-employed; nevertheless, those who do not by any definition fit within the “h-w-p” category have bleak prospects.

The understanding of what constitutes essential spending has changed to encompass many things outside the food, clothing and shelter paradigm.

Some of the percentage uplifts now appearing are against a low base and are probably not sustainable and certainly should not be projected.

Confidence lifts when people start to see the balance between discretionary and essential spending tilting in their favour; some way to go for many here.

The performance of savings and the destruction of wealth are hugely significant but barely get a mention.

One of the tragedies of the recession is that we have lost so much home-grown capacity and, when things do look up, we must do more to ensure money stays in the economy to add value to any growth.

Material factors are not the only tokens of living standards and the quality of life.

Profile photo of Matthew Oakley
Member

Thanks for the comments John – some interesting thoughts, which coincide with a lot of what our data are showing. A few responses:

– You’re right on mixed experiences. For instance our polling shows that attitudes towards prospects for personal finances in the next year have quite large regional differences. e.g. see this chart: https://twitter.com/MJ_Oakley/status/463652081845669888/photo/1 (it shows the balance between proportion of people who think finances will get better and those that think they will get worse. Positive is good (more people think finances will get better) and negative is bad).

– On essentials – I take the point that “essentials” are changing. However, even if you just look at housing costs and utility bills, the proportion of consumer budgets that they take up has been rising (in some cases considerably) over time. That means that consumers have less to spend on more discretionary items (e.g. holidays, leisure).

– On quality of life – yes I completely agree. There’s some really interesting work going on at the moment on “well-being”. The Office for National Statistics has even started to think about it (e.g. see here: http://www.ons.gov.uk/ons/rel/wellbeing/measuring-national-well-being/life-in-the-uk–2014/info-life-in-the-uk.html ). We also look at some of these questions in our monthly polling of consumers (see here: http://consumerinsight.which.co.uk ). As an aside – this debate will come to the fore in October when revisions to how we calculate GDP will magically increase previous estimates by several percentage points. This will mean that measured living standards rise – but in practice, nothing will have changed….

All in all, it’s clear that increasing living standards (and well-being) is going to be a long-term challenge for policy makers. So we’ll keep pushing in the right direction!

Member
Joe says:
9 May 2014

As soon as they think they can the bankers will raise the base rate, giving them the excuse for interest rates to go up all round, aided and abetted by their buddies the politicians.
They will argue it is good for savers, which it is and not that they cared much recently, but watch the number of foreclosures go up as householders are unable to meet mortgage payments.
This won’t happen till after the election next year, for after all they need to keep the illusion going till we have voted, then watch the rush of the Gaderine Swine into the trough!

We owe a huge debt and it will have to be paid back somehow. Probably by inflation if they can get that working again, but this will take years and so much of the pain has yet to come. Basically, excessive debt kills you and creates desperation, and that where we really are!