Living standards 2016 deserves a better press on living standards – we’ll miss it when it’s gone 21 December 2016 by Torsten Bell Torsten Bell 2016 is getting a bad press. The reasons are many and varied, crossing from the tragic to the frivolous. Syria, Berlin, Zika, Prince/Bowie, Trump, and (for some) Brexit – all get included in the charge sheet. But on living standards at least we may well come to look back at 2016 with fond nostalgia – not least given what 2017 looks set to have to offer. The issue is not that last year was awful, more that it risks being as good as it gets. Let’s start with some simple facts to encourage a reappraisal of 2016, especially the first half of the year. Average household income may have grown at the fastest rate since 2001 in the year to April 2016, according to ONS analysis. This wasn’t just about pensioners either, non-retired household income grew by around 3 per cent. These growth rates were pretty evenly shared too. Forthcoming Resolution Foundation research shows that all parts of the income distribution saw income growth of over 2 per cent. This wasn’t a one off – 2014-15 was similarly strong too. Very rapid employment growth coupled with near zero inflation created a solid living standards recovery over the past few years, with the added bonus for low earners of the National Living Wage more recently. These are good results, but obviously no one expects dancing in the streets as this income recovery has come off the back of an unprecedented income squeeze in the crisis years. Indeed non-retired incomes have only just returned to pre-crisis levels. But in some ways more concerning than the past, which we can do very little about, is the future. People may not have loved 2016 but we may come to miss the income rises it saw. So why the anxiety about 2017? Firstly because the scale of employment growth we have recently seen cannot be sustained indefinitely. In fact it has already slowed to a trickle as the labour market has entered a holding pattern since May. The good news is that employment remains close to record highs at over 75 per cent and firms are by and large not planning on shrinking their workforces. The bad news is that without further employment growth in 2017 one of the big boosts to household incomes of recent years (more people working and earning) will weaken. That leaves other determinants of income growth to pick up the slack. Unfortunately they look set to do the opposite. On pay, our living standards anxiety for 2017 has more to do with the supermarket than the labour market – or to put it another way rising prices are the big New Year threat to how far our pay packets can stretch. Ultra low inflation in recent years has boosted real pay rises, with real pay growth nearing 3 per cent in late 2015, hovering around 2 per cent for much of 2016 and now standing at 1.7 per cent annual growth over the three months to October. But new Resolution Foundation analysis of official forecasts for pay and inflation shows that we are on course for fast, significant and repeated falls in real earnings growth early in the New Year. This earnings freefall means we expect wage growth to fall to around 1 per cent in the three months to January (figures which will be released in mid-March) – the slowest real wage rises in over two years. With inflation forecast to continue rising we project real earnings growth hovering around, or even below, zero for the second half of the year. A return to the pay squeeze we thought we had left behind in 2014 is a real risk. This is not about changes in actual pay rises being awarded – almost all of this drop is being driven by rising inflation, as the impact of sterling’s post-referendum depreciation feeds through into higher import prices and filling up your car gets more expensive following recent oil price rises. Now of course there is a lot of uncertainty about month to month movements in both inflation and earnings figures, leaving aside uncertainty about the impact of Brexit. Supermarket competition may continue to hold down food prices, or it may not. But what there is almost total consensus on is that the direction of travel for price rises is up – and there is little sign of wage rises following suit. Similarly you don’t need to know much about the government’s plans to cut billions of pounds from in-work benefits to realise that, just as with pay growth, the welfare state is not going to be taking up the slack in boosting incomes in 2017. You might not have got everything you wanted in 2016 – but when it comes to family incomes, you’ll miss it when it’s gone.