Household incomes suffer longest fall on record – and worse is to come

Families suffered their longest-ever squeeze on disposable incomes even before Vladimir Putin’s invasion of Ukraine compounded the shock by sending energy bills soaring.

Disposable incomes unexpectedly slipped 0.2pc in real terms during the first three months of 2022, falling for a record fourth consecutive quarter, according to the Office for National Statistics.

Economists had expected a rise and incomes are down 1.3pc compared to a year earlier with much worse to come.

The figures indicate that households had a smaller buffer to cope with the looming bigger income shocks caused by the war in Ukraine, stoking recession fears. Incomes are being squeezed by wages failing to keep pace with inflation, which hit a 40-year high of 9.1pc in May.

However, households are not yet reducing the rate of saving to cushion the shock to incomes, official figures showed.

The household saving ratio - how much disposable income is being saved - was unchanged at 6.8pc in the first quarter, still higher than pre-pandemic levels. Economists warned that families dipping into their savings rather than cutting back on spending will be crucial to avoiding a deeper downturn.

The ONS also revealed that the current account deficit, when the value of goods, services and investment imported exceeds the total exported, widened to a record £52bn after the figures were boosted by surging energy prices.

The statistician left its estimate for first quarter GDP growth unchanged at 0.8pc but economists expect a fall in output in the second quarter as household budgets are squeezed.

Disposable incomes will have suffered an even larger fall in the second quarter after tax rises and the surge in gas and electricity bills caused by the 54pc increase in the energy price cap.

Officials projections suggest the fall in disposable incomes this year will be the biggest on record with energy bills set to rise even higher in the autumn.

Paul Dales, chief UK economist at Capital Economics, said the figures “leave households looking a bit more vulnerable to the big fall in real incomes that’s going to hit in the second quarter and third quarter”.

He added: “Although GDP and consumer spending won’t fall as far as real incomes, it’s pretty clear that the economy is going to be very weak for a while. A recession is a real risk.”

Real incomes will fall by 2pc in 2022 as a whole as the falls intensify in the coming months, Capital Economics predicted.

Andrew Bailey, the Governor of the Bank of England, warned yesterday that the UK economy is heading in a steeper and faster downturn than other advanced countries after the huge shock to incomes.

He said: “We are being hit by a very large national real income shock, which is coming from outside.

“The scale of the shock is very substantial and in and of itself it will have an effect, a big effect, because it will reduce domestic demand and it will pass through into the labour market and it will pass through into inflation.”

Mr Bailey also warned that the UK is set to suffer more persistent inflation than other countries because of the design of the energy price cap. The cap set by Ofgem will likely come down slower when energy prices do eventually cool.

Forecasters warned that the UK outlook will hinge on whether households will reduce saving rather than spending.

Many households accumulated huge savings during lockdowns when their spending was cut by businesses being temporarily closed. Spending could be propped up by households running down their savings, but consumer confidence has collapsed to record lows.

Sandra Horsfield, economist at Investec, warned the UK will enter a recession but added that “the relatively solid position of the household sector will keep the downturn a relatively mild one by recent historical standards”.

She said: “The extent to which households are willing to cut back on saving rather than spending will be a key determinant of the outlook from here. We expect the UK economy to enter a recession around the turn of the year.”

Martin Beck, chief economic advisor to the EY ITEM Club, said families using their lockdown savings to prevent a slump in spending is “a far from certain prospect”.

He said: “Hopes of avoiding a consumer recession rest on households who accumulated 'excess' savings during the pandemic spending a good amount of those funds.

“There's scope for this to happen, but it's unlikely to be enough to prevent consumer spending growth slowing further.”