The squeeze in living standards & the risks to the growth forecasts
So what does the OBR have to say about this going forward? The news is grim.
Household disposable income is forecast to have fallen by 2.3 per cent in 2011, a post-war record.
The news going ahead is equally distressing
It is not until 2014 that we expect earnings to rise faster than prices by a significant margin.
In other words the two year squeeze on real incomes is set to last for at least another three years.
Real household disposable income is now expected to fall by a further 0.3% in 2012 before gradually recovering in the following years – up by 0.9% in 2013, 2.0% in 2014 and 2.5%
Over the course of 2010 to 2015 the average growth in real household disposable income (RHDI) will have been just 0.5% per annum.
By contrast RHDI grew by an average rate of 3.2% from the early 1990s until the mid 2000s and even during the years immediately leading up to the crash (recognised by the Resolution Foundation as a time of a growing squeeze on many households) it grew by 1.4% per annum.
The OBR is once again forecasting that private spending by households will rise faster than RHDI – something it has previously predicted and hasn’t come to pass.
In 2012 it expects incomes to fall by 0.3% but spending to rise by 0.2%, in 2013 incomes will increase by 0.9% but spending by 1.2%, in 2014 incomes will grow by 2.0% by spending by 2.2% and in 2015 whilst incomes rise by 2.5% spending will increase by 2.7%.
I am not sure how realistic these forecasts will turn out to be. And they matter greatly because despite all the talk of ‘rebalancing’ the government is still dependent on consumption to drive growth. Something made clear by the chart below:
Next year consumption (shown as the blue bar with the red bar being the other components of growth) is expected to contribute around 15% of growth but by 2015 the OBR expects it to provide 60% of growth. Over the next 4 years increased consumption represents around 50% of all the OBR’s forecast growth.
There is potentially a very large downside risk to the OBR forecasts in this area. It’s yet another reason why the government should be focusing on relieving the squeeze in living standards – something that would allow household’s to consume in a sustainable manner and get the economy back on track.