Income squeeze to worsen

By Chris Dillow, 04 May 2011

The fall in real personal incomes is likely to continue, economists warn. "Households are already suffering the biggest squeeze on their incomes in decades. But the worst may be yet to come," says Roger Bootle, economic advisor at Deloitte. He expects wages to rise by around 1.5 percentage points less than consumer prices this year. This would be the fourth successive annual fall in real wages - something which, he says, has not happened since the 1870s. And, with unemployment set to rise and some welfare benefits being cut, overall household incomes could fall by even more. Mr Bootle expects real disposable incomes to fall by 2 per cent this year - equivalent to a loss of £780 for the average household - the biggest annual fall since records began in 1955.

Thanks to this, he says, "the outlook for consumer spending is pretty dismal". He expects it to fall in real terms both this year and next. His fears were corroborated this week by a survey from the CBI. It found that retailers reported that sales in the first half of April were poor for the time of year, and that no growth was expected in May. "Conditions on the high street look like remaining tough," said Ian McCafferty, the CBI's chief economic advisor.

But the fall in household incomes matters well beyond retailing. Nick Bate of Bank of America Merrill Lynch points out that real wages are falling not because profits are booming, but rather because import prices have risen and productivity is falling. Official figures show that output per worker-hour has fallen by 2.5 per cent in the last three years, and even excluding government activity, it is lower now than it was in 2006. This suggests that the UK economy has suffered what Martin Lettau and Sydney Ludvigson, two US economists, call a permanent productivity shock.

Such a shock - which is consistent with the fact that capital spending has been weak for years - means that, unless things change, the entire economy will grow slowly. To the extent that this happens, it would not only be workers that suffer. So, too, will savers because low growth means low real interest rates. And so, too, will shareholders because dividend growth, at least in aggregate, will be low.

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