Average UK household disposable income is set to fall by two per cent this year resulting in much slower GDP growth than the Office for Budget Responsibility (OBR) has predicted, according to a new report published today.
The Centre for Economics and Business Research (Cebr) estimates that real household incomes will drop 2.8 per cent between 2009 and 2011 - the biggest two-year fall since 1921, excluding World War II and the General Strike of 1926.
An increasing amount of pressure has been placed on household incomes in recent years, with average earnings growth staying low at the same time as accelerating commodity price inflation.
Cebr highlights rising prices of energy, cotton, metals and other raw materials and food as the major factor behind this financial squeeze in the UK, but the public spending cuts announced in Chancellor George Osborne’s emergency Budget last year are only playing a minor role in the drop in household incomes.
The group’s forecast for 2011 estimates that the annual rate of inflation will come in at 3.9 per cent, the highest for 19 years, while earnings growth will increase by just 1.9 per cent.
With Office for National Statistics data showing that the unemployment level reached 2.53 million in the three months to the end of January 2011, the Cebr is expecting the jobless number to remain high in the 12 months ahead.
Scott Corfe, Cebr economist and main author of the report, said: “The unprecedented peacetime squeeze on real household incomes, combined with more realistic forecasts for exports and investment growth than the OBR, means that GDP growth will be subdued for the next two or three years, though we expect growth to accelerate towards 2015.”
Douglas McWilliams, another of the report’s authors and Cebr CEO, added: “The OBR now forecasts that squeezed incomes will be offset by a record increase in indebtedness: it is surprising that after a debt fuelled consumer boom and housing bubble that they think either that borrowers will be prepared to borrow that amount or that lenders will be in a position to lend that amount, let alone both.”