Press Centre

Squeeze on family finances set to last another five years

By 2018, the average UK household will be £1,300 a year worse off in real terms than in 2009, when spending power was at its peak, according to a major new study by Asda

Over the next five years:

  • RISING COST OF LIVING –The average UK household will spend £3,900 a year more on essential items – like transport, utilities and housing – than they do now
  • INFLATION OUTPACING WAGES – Consumer price inflation will outpace wage growth, growing year on year by an average of 2.5% compared to average wage increases of 2.2% a year between 2013 and 2018
  • FEELING THE SQUEEZE – Lower income households will see their discretionary income fall in nominal terms by almost a third (29%) to £1,200 a year – equivalent to just £23 a week
  • A RISE IN THE INCOME TAX THRESHOLD would help families says Asda boss

Midday, Wednesday 11th September 2013 – UK households will be £1,300 a year worse off in real terms in 2018 compared to 2009 when spending power was at its peak, as rising costs, stagnating pay and austerity measures continue to squeeze disposable income, a major new report by Asda warns today.

The report, launched today to mark five years of the Asda Income Tracker at a panel debate at London’s City Hall, looks at how families/people have been affected by the economic climate over the last five years, as well as looking ahead to the next five years. The research was carried out by the Centre for Economic and Business Research and finds that in 2013, the average UK household is £868 a year worse off, in real terms, than they were in 2009.

Furthermore, the level of household discretionary income is likely to stand at or below the current £160 a week mark until the last quarter of 2018, when it will begin to rise above this level once more.

However, when the effects of price rises in non-essential items is also considered, the spending power of the average UK household will be falling further (this £160 a week will buy less each year). By 2019, the average UK household will have just £147 a week of real disposable income in 2012 prices, down £25 a week on the levels seen in 2009.

Stubbornly slow income growth and rising inflation will continue to be the big factor impacting the squeeze on living, with price inflation on essential items expected to outstrip average pay growth until 2018. As a result, over the next five years the average UK household is expected to spend £3,900 a year more on essential items than they do today – like housing and utilities (up £652 a year by 2018), transport (up £663 a year by 2018) and mortgage interest (up £599 a year by 2018).

Continued weaknesses in the labour market will also add to the squeeze. Wage growth is unlikely to top pre-recession levels (4%) in the next five years. Although private sector job creation is expected to help bring down joblessness, further public sector cuts are forecast to prevent the unemployment rate from falling beneath 7% over the next five years.

The findings of the report are being discussed at City Hall today by a panel of eminent business leaders, politicians and commentators: Nick Robinson (journalist and broadcaster); Andy Clarke (CEO of Asda); Doug McWilliams (Executive Chairman and Founder of CEBR); Gavin Kelly (CEO of The Resolution Foundation), Esther McVey (Conservative MP for Wirral West and the minister for disabled people) and Clippy McKenna (Entrepreneur and Founder of the Clippy’s brand).

Andy Clarke, Asda President and CEO, said:

“Looking ahead to the next five years, one thing is clear: it’s going to remain incredibly tough for consumers. While the economy may be on the road to recovery, our special, one-off report shows that the economic reality for them is very different depending on where you live and your age. I want a fair recovery: and as the benefits of the recovery should be fairly distributed, there should be fairness in respect of the actions taken to reduce the structural deficit.

“Over the next five years we need targeted support from both Government and business to help those people who face the greatest squeeze on their incomes and living standards. I’d like to see better opportunities for the 1 million young people currently out of work and an increase in the income tax threshold to bring it into line with the salary of someone on the national minimum wage. This will benefit everyone, helping to stimulate spending and economic growth, particularly those on the lowest incomes whom we know will be the hardest hit over the next five years.”

Clarke added:

“When we launched the Income Tracker five years ago to better understand the spending power of households across the UK, we could not have foreseen what has financially been the hardest five years this generation has known. As a company, Asda’s core drive is to understand and respond to the changing needs and circumstances of consumers. The income tracker helps us to achieve this, while allowing us to speak up on their behalf. For five years, we have used the evidence we have gathered to highlight the way in which global economic developments impact the lives of every one of us. Five years on, it’s clear from the tracker and from speaking to our customers that the fall out from these events is still being felt.”

The report reveals that it is not a single story across the whole of the UK.

Lower income groups hit hardest

Lower-income households and single parents are expected to see their disposable income squeezed the most over the next five years – by a third and almost a sixth respectively – following the introduction of a 1% cap on working-age benefits in January 2013.

This – combined with the rapidly rising cost of living – means that in 2018 both groups will spend over a fifth of their weekly essentials budgets on rent and utilities (each at 22%) – more than most other household types. By 2018, lower income families will have just £23 a week to spend after bills and essential items have been paid for.

Conversely, higher income households are expected to see slow but steady growth (+2% or £300 in annual terms) in discretionary spending power between 2013 and 2018, as wage growth slowly starts to recover.

Northern Ireland to take further blows to discretionary spending power
Across the regions, London and the East of England are expected to see the fastest growth in discretionary income over the next five years – up 3.3% and 4.9% respectively in nominal terms – as labour conditions in the UK slowly start to improve.

However, households in Northern Ireland, are expected to face a 20% decline in their spending power of the next five years in nominal terms, due in part to the region’s high dependency on state support and employment, both of which are expected to fall, as well be as outpaced by the cost of living.

Doug McWilliams, Executive Chairman and Founder of CEBR, said:

“After a tumultuous five years for household finances, the UK economy is finally in recovery mode. However, my sense is that this is a business-led recovery and households are not benefitting as much as would normally be expected in an upswing. Indeed, in 2013 the Asda Income Tracker stands 3.7% down from its peak and although the UK economy is now accelerating, unemployment remains elevated and pay growth has run behind essential item inflation for three and a half years. This trend is not expected to change any time soon as underemployment holds back pay growth. In addition, an expected rise in interest rates in 2016 means that average household discretionary incomes will continue to stagnate over the next five years. Only by 2018 do we expect nominal discretionary incomes to start rising but by then on our forecasts spending power in cash terms will still be 1.4% lower than its 2009 peak.”

Looking back at the last five years, other major findings in the report include:

  • The price of essential items has been rising faster than wages every month for the last three and a half years: wages have been growing at an average of 1.8% since 2010, while essential item inflation has been running at 3.5% over the same period;
  • The average UK household is now spending £2,808 a year more on essential items – such as transport (up £654 a year compared to 2008) and housing and utility bills (up £719 a year compared to 2008) – than they did five years ago;
  • The younger generation (adults under 30) has been hardest hit – their disposable income is down 4.7% since 2008, equivalent to £200 annually. In contrast the spending power for 30-49 year olds increased 13% over the same period, while those aged 65-74 and 75+ increased 11.9% and 18.5% respectively;
  • The under-30s have seen the fastest average increase in the cost of living of any working age household over the past five years (3.3% a year) compared to 2.5% for 30-49 year olds and 3.1% for 50-64 year olds.

Gavin Kelly, Chief Executive of the Resolution Foundation added:

“This timely report sets out in the starkest terms the further hit to living standards anticipated by the Asda Income Tracker. It’s a wake-up call to those who think family budgets are about to turn a corner – telling us the typical household is expected to be £1,300 worse off in 2018 than they were a decade earlier, with the young and poor faring worst of all.”

A full copy of the report, as well as a shorter version with infographics, is available for download here:

Posted in Press Centre on 11 September 2013