Saturday, July 30, 2011

UK households squeezed harder than US or Europe

UK households are suffering a tighter squeeze on disposable incomes than either the US or the rest of Europe, due largely to the weakness of sterling.

According to research by Haver Analytics, real disposable income is shrinking at a rate of about 3pc in the UK, but is contracting by just 0.5pc in the eurozone and continues to rise by 2pc in the US. The main squeeze on households has come from rising prices for food and energy, uniform across the world, but the weak pound has exacerbated the problem in the UK.

Peter Spencer, professor of economics and finance at the University of York, said: "It is the devaluation of the pound that has added to pressures on households. All other things being equal, we would still be paying more for imports than they [the US and Europe] would."

The pound has fallen by about 20pc against a basket of currencies since 2007, increasing the cost of imports. As the UK is a net importer, the squeeze on households has been more marked than the benefits of more competitive exports enjoyed by manufacturers. Households are now forecast to suffer a second successive year of sliding real disposable incomes, after enduring the biggest fall in spending power in 34 years.

Some economists believe that the Bank of England should raise rates to strengthen the pound and reduce imported inflation. However, the Bank's Monetary Policy Committee is this week expected to leave rates at 0.5pc for the 29th month running.

Official statistics last week showed that the recovery has yet to take hold, with the country only able to grow by 0.2pc in the three months to June. (more)