The UK economy is struggling to recover from the Great Recession of 2008-9. While profitability has recovered, British big business is still refusing to invest. In Q1’11, UK gross fixed investment slumped by 4.4% compared with Q4’10, while household consumption fell 0.6%. Most significant, business investment excluding property fell 7.1% (manufacturing investment fell 1.1%). It prefers to heap up the cash, invest abroad or speculate in stock markets rather than invest in expanding production or employment in the UK. And while that continues British households on average will continue to suffer significant losses in living standards.
Household spending is set to experience the slowest pick-up of any post-recession period since 1830, according to a survey of economists. British consumers will spending barely more by 2015 than they were before the financial crisis in 2008. In the UK’s 18 major recessions since records began in 1830, Bank of England data show consumer spending on average recovered to 12% above its previous peak within seven years. But forecasts by the UK’s Office for Budget Responsibility put spending in 2015 at just 5.4% above the 2008 peak, making it the slowest recovery of any comparable post-recession period. After recessions in the early 1980s and 1990s, spending was 20% and 15% higher respectively.
That household spending will be so laboured is not surprising as the average British household faces the biggest drop in income for 30 years. Average income could fall 3% this year, the steepest drop since 1981 and taking households back to 2004-5 levels. The Institute for Fiscal Studies said average take-home incomes actually rose during recent recession due to low inflation and higher social benefits. But IFS analysis suggests the long-term effects of the recession and higher inflation will soon squeeze incomes. Lower wage increases and the corrosive effect of rising inflation mean that it is “entirely possible” that income this year will return to levels of six years ago. Even the Bank of England warned that UK households faced a significant cut in their spending power as inflation heads towards a 5% annual rate.
As well as household incomes falling in real terms (after inflation), household wealth is set to take a significant tumble too. The main form of wealth for the average households is the home they own (less the mortgage debt they owe). So if home prices fall, most Britons get poorer. UK home prices took a tumble during the Great Recession but appeared to be recovering from mid-2009. But the squeeze on real incomes and inability to borrow is producing another downward leg in home prices (except for the richer parts of London, where restored bankers’ bonuses are spent and rich foreigners want to live). Some forecasters are now expecting UK house prices to be 10% below end-2010 levels by the end of 2012.
All this does not bode well for the coalition government’s national growth targets. The government has already downgraded its forecast for 2011 to 1.7%. The OECD reckons that the UK will grow the slowest of all the major capitalist economies this year. Economic growth is likely to be a lot slower than the government hopes. It may be a recovery for big business and their profits, but it is increasingly looking like a depression for the average household.