Economic recovery at risk as households are forced to dip into savings

Household finances in Britain are deteriorating at their fastest rate since the depths of the recession in 2009 amid fresh evidence that consumers are struggling to cope with rising prices and curbs on wages.

Fuelling fears that the economy is flirting with a double-dip recession, the monthly Markit index showed an increasingly gloomy public running down savings and taking on more debt in an attempt to make ends meet.

The survey suggested that the boost to spending provided in May by hot weather and the royal wedding has proved short lived, with six times as many households (36%) reporting that their finances had worsened this month compared with those registering an improvement (6%).

Official figures for retail sales in May, published last week, showed a 1.4% drop in the volume of high-street activity and the Markit report will be seen by the City as fresh evidence that the economy remains in the doldrums after the longest and deepest recession since the 1930s. Output has flatlined since last autumn, with a snow-affected 0.5% decline in gross domestic product in the final three months of 2010 matched by growth of 0.5% in the first quarter of 2011 as activity rebounded. The City has been revising down its estimates of growth in the second quarter in the light of figures showing weak consumption and a slowdown in factory output.

Tim Moore, senior economist at Markit, said: "It may be summertime but the living is far from easy. The decline in the index pours cold water on the tentative signs of improvement seen in the previous month. The grim figures show household finances deteriorating at the fastest pace since early 2009, with people eroding their savings and taking on more debt to finance strong rises in living costs, as income from employment continued to fall in June.

"The job security index, which can provide a coalface view of labour market conditions, highlighted how employees in both the private and public sectors remain deeply concerned about holding on to their job. This may help keep inflationary pressures from building further, but it also means that the consumer will act as a drag on an already fragile economic recovery," he said.

Markit, a financial information company, said that data collected by Mori for its monthly index showed that half of households expect their finances to deteriorate over the coming year, with only 19% anticipating an improvement.

It said household spending had picked up in June for all but the poorest households but noted: "Higher spending, at least in part, reflected higher consumer prices and was against a backdrop of lower savings and reduced income from employment. Three times as many households (30%) noted a drop in savings as those that indicated a rise."

Although the Markit survey has a short track record of only two and a half years, the data showed the second-fastest rise in debt during that period. One in five respondents reported an increase in debt compared with 15% reporting a fall. Markit said that the sharpest increase had been among 18- to 24-year-olds.

The Office for National Statistics reported last week that average pay was rising at only 1.8% a year in April, failing to keep up with inflation as measured by the consumer prices index, which stands at 4.5%. Unemployment, though, recorded its fastest decline since summer 2000, falling by 88,000 in the three months to April.

Source : Larry Elliott - Guardian.co.uk
www.guardian.co.uk/business/2011/jun/20/economic-growth-consumer-spending