Household finances are a ‘millstone’ around the neck of recovery

A new poll out today from the Resolution Foundation confirms the extent to which poor household finances are now exerting a downward pull on the UK economy. The poll, carried out for the Foundation by ipsos MORI, finds that almost half of all people on low-to-middle incomes now say have no cash left over at the end of each month. More than one in four say they don’t make any regular savings. The findings reveal in stark terms that millions of ordinary households – not the poorest, and the vast majority in work – are now living on the edge of their means.

In a sense, the poll is no surprise in light of line of recent ONS data. With disposable income falling in real terms, households are finding themselves left with two unpalatable options: either cutting back on their spending or digging into savings. Both have serious implications for the prospects of sustainable UK recovery.

As I highlighted in a recent blog post, it’s now increasingly clear – as many predicted – that a recovery from the recent ‘balance sheet recession’ will be slow and tough. As Figure 1 shows, in the past three major recessions to have hit the UK, it was at around this point – 10 quarters on from the onset of the contraction – that household consumption began to pick up again strongly. On each occasion, that helped lift the economy back into sustained growth. This time around, a combination of historically high household debt and falling disposable income means consumption is proving little more than a millstone.

Figure 1: Household consumption following the onset of recession

% fall in real household consumption

This blog first appeared on Left Foot Forward