The squeeze on household spending power

Consumer spending growth has been faster and less volatile than disposable income growth since 1996. Households have both smoothed and boosted their spending growth in the face of variable income growth rates by leveraging their access to credit, notably through housing equity withdrawal. These trends have pushed savings rates (net of borrowing) down to very low levels and raised household debt to very high levels relative to incomes.

As discussed in detail in Section III below, however, the factors that have underpinned these developments - such as robust employment growth, low inflation and interest rates, and rising house prices - have already begun to unwind. In the coming 18 months they will provide considerably less support to household income and spending growth than in recent years, or even turn significantly negative in their effects in the case of falling house prices and higher inflation (see Table 1.2).

Table 1.2: Outlook for UK household income and spending growth

* accelerating growth;  decelerating growth;  stable growth.

Source: ONS for 2004-7; PricewaterhouseCoopers' assessments for 2008-9

Discretionary household spending power is being squeezed particularly hard by the recent rapid rise in the costs of non-discretionary items such as utilities, food, rental payments and debt servicing. Across income deciles, it would appear that the poorest households are being squeezed the most owing to the larger share of their incomes that are dedicated to paying for domestic energy and food in particular. However, rising petrol costs are also hitting those towards the top end of the income distribution.

At the aggregate level, the outlook for household spending growth in the UK, particularly on discretionary items, is therefore looking much more subdued for 2008-9 than at any time since the early 1990s, as reflected in our macroeconomic projections above.