Enfield, North London is trademark British suburbia. Middle-income but with patches of poverty and patches of wealth, the high street is dominated by chain stores and a scattering of chain-owned pubs.
On first sight, there are few signs here that the UK is recovering slowly from a deep recession.
But look closer and things don’t look so good. The local council is one of many in Britain to adopt the policy of dressing up closed-down storefronts to resemble thriving local stores.
With many of the facades now entering their third year, some are faded and peeling. On one, a scribble of graffiti backs the ‘BNP’, a far right fascist party.
Poker players might call it a ‘tell’ – a ripple of nerves from an economy that knows it’s anxiously hovering around zero. UK GDP contracted by 0.5% in Q4 2010 and grew by 0.5% in Q1 2011. With last winter’s terrible weather forcing down the Q4 result and displacing some activity into Q1, that’s in effect six months of no growth. Britain’s Chancellor is already committed to an economic policy of rapid deficit reduction that starts to bite this year. All sides wait to see if GDP growth will now tick up or down.
New figures this week from the UK Office for National Statistics gave cause for concern, showing terrible performance from consumption. From Q1 to Q2 this year, UK disposable income saw its biggest fall
for 44 years. With Retail Price Index (RPI) inflation running at 5.3 per cent and nominal earnings growth at 1.8 per cent, households are seeing their wages (and savings) fall sharply in real terms.
Even Mervyn King, the measured governor of the Bank of England, says Britain’s households are now experiencing a “substantial squeeze on real living standards“. That’s reflected in figures showing that
household final expenditure is down 0.6 per cent in the quarter. This week saw new waves of high street names announce store closures; major British chains from Thornton’s to Habitat to Comet are all
scaling back. Thousands of jobs will go.
Perhaps most worrying, though, is what this week’s new stats say about the UK savings ratio. Normally, so long after a recession, households are beginning to repair their balance sheets. Yet Britain’s savings ratio is not rising but falling, down from 5.1 per cent in Q1 2011 to 4.6 per cent in Q2. Even while they’re cutting back on spending, households are having to take on more debt just to stay afloat. Given the role of consumer credit in triggering the 2008-09 financial crisis that’s not a fact we should take lightly. On current
trends, the UK is heading for a debt-fuelled recovery from a debt-triggered crisis.
Of course in some sense it’s not surprising that households are now dipping into their savings. The Chancellor’s program of spending cuts are only now starting to bite and with inflation spiking on the back of global commodity prices, this was always going to be a difficult year. Yet this explanation would be more reassuring if the current squeeze on real incomes looked likely to be brief. If forecasters were predicting a strong recovery next year, or if Britain’s program of spending cuts and tax rises was set to abate
in the near future, a temporary dip into healthy savings would be nothing to fear.
But the average independent forecast for the UK economy is now for growth of 1.5 in 2011 and 2.1 in 2012, figures that have been revised down in recent months. Inflation is set to outpace wage-growth until at least 2013. On the government’s current plans, benefits for families – from tax credits to Child Benefit – won’t see
their biggest cuts until 2013. The negative impact of those cuts on consumer confidence is likely to continue. And of course household savings aren’t at a healthy level; household debt is historically
high. Access to credit remains limited. In that context, further borrowing can’t offer a sustainable route to recovery by propping up consumption over the medium-term.
Even so, some would say, the UK is in a period of rebalancing. The British government are pursuing an export-led recovery. That is a sensible strategy and, as a natural corollary, means weaker consumption-growth as the weight of Britain’s economy shifts. But even a rapid rebalancing can’t get away from the fact that household final consumption spending is currently 65 per cent of UK GDP. If it continues to fall, that will exert a drag on economic recovery that’s very hard to overcome. Moderate consumption performance is likely to be a precondition for a return to strong, sustained growth.
That all explains why concerns about household living standards are moving to the forefront of the UK’s national economic debate. A recovery at the household level will be critical to a recovery at the national level. If Britain’s workers don’t soon feel relief from the ongoing squeeze, the impact on the high street will become increasingly hard to hide.
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