Tough Times Ahead for UK Households
2011 will be a testing year for the majority of the UK population. The crux of the problem is the declining disposable income of households. Disposable income is the total household resources minus consumption expenditure.
Between 1999 and 2008 the average annual increase of disposable income of UK households was 2.2%. For the same period household consumption produced an average annual increase of 2.9%. Then the financial crisis struck and the numbers changed dramatically. Disposable income in 2009 increased by 3.2% YoY, but was driven by an analogous decline of -3.2% in household consumption. The 2010 figures for household consumption and disposable income both produced a YoY growth of 0.2%. The 2011 forecast from the Office for Budget Responsibility for household consumption is 1.3%, while the increase in disposable income is 1.2%.
Why is it that when households are consuming less their disposable income is hardly increasing at all? The answer is rising inflation and stagnating incomes.
This means that real wages are no higher in 2011 than they were in 2005 – effectively a six year pay freeze.
According to Mervyn King, the governor of the Bank of England (BoE), this situation will persist for the foreseeable future.
If inflation persists, and the inflation hawks get the upper hand in BoE’ Monetary Policy Committee, interest rates will be raised; shaving off additional purchasing power from suffering households. The price that the UK is paying for the financial crisis is painful indeed.
Can workers ask for higher pay increases? Unlikely, as there is plenty of spare capacity out there. Unemployment is currently at 2.5 million (7.9%) and it could reach 3 million if all the redundancies in the public sector are not absorbed by the private sector, which at the moment seems implausible.
The private sector is currently too preoccupied with rising costs to take up additional manpower. The cost of energy, especially oil, is eating into firms’ margin and the political turmoil in the Middle East is not only causing panic buys and giving speculators a free reign, but also, as in the case of Libya, actually reducing supply.
The January ASDA income tracker compiled by the Centre for Economics and Business Research showed that the average UK household had a 4.5% drop in its weekly discretionary income (from £180 to £172) compared to the same month a year earlier. Discretionary spending is what families use for entertainment.
Ladbrokes reported that its stake per slip decreased by 0.5%, from £8.40 in 2009 to £8.36 in 2010, while William Hill reported for 2010 a broadly flat betting slip volume, but pence per slip decreased by 2% YoY. And these results were achieved in a World Cup year.
All the data point to a 2011 poorer than 2010, and there are no great events as the World Cup to boost revenue. Cost control, customer retention, diversifying revenue streams and product development are a must to survive what certainly will be a tough year.