UK Cost-of-Living Crisis Eases With Rise in Real Incomes

Britain’s cost-of-living crisis showed signs of easing up with the first increase in real incomes since 2021 and a surprise rise in economic output that put the risk of recession further behind.

(Bloomberg) — Britain’s cost-of-living crisis showed signs of easing up with the first increase in real incomes since 2021 and a surprise rise in economic output that put the risk of recession further behind. 

Adjusted for inflation, household disposable incomes per head rose 1.2% in the fourth quarter, the Office for National Statistics said Friday. It follows four consecutive quarters of decline that left families over 3% poorer. 

The figures accompanied a revised reading for gross domestic product, showing 0.1% growth instead of the stagnation that was previously estimated. That’s a fillip for Prime Minister Rishi Sunak, whose Conservative Party trails far behind the Labour opposition with a general election expected next year. 

The revival will reinforce hopes that Britain can avoid a recession this year, as predicted by the Bank of England and the Office for Budget Responsibility. With energy costs coming down and wages rising strongly, the central bank last week said it thinks the period of falling real incomes is over.

That also may sharpen the focus on inflation, which has lingered in double digits five times above the BOE’s target for longer than expected. Investors expect the central bank to raise its key rate at least once more from the current 4.25%.

The GDP figures mean Britain dodged a recession last year with a greater margin for comfort. But output was still 0.6% lower than its pre-pandemic level, making the UK the only Group of Seven economy that has yet to fully recover.

“The economy performed a little more strongly in the latter half of last year than previously estimated, with later data showing telecommunications, construction and manufacturing all faring better than initially thought in the latest quarter,” said Darren Morgan, the ONS’s director of economic statistics.

Disposable income per head fell 2.3% in 2022 as a whole, the most since 2011, as wages failed to keep pace with runaway inflation. The turnaround in the fourth quarter was helped by billions of pounds of direct payments to households to subidize their energy bills.

Stronger-than-expected recent data on retail sales and the the labor market have left forecasters predicting only a small contraction in the first quarter, with many — including the BOE — expecting a bounce back in the following three months.  

That’s despite the terms of trade shock caused by energy prices and the fastest monetary tightening since the late 1980s, as the BOE raised rates from 0.1% to 4.25% in 16 months. Money markets are fully pricing in one more 25 basis-point hike and the strong possibility of further action. 

A key risk now is that lenders restrict credit in response to the recent concerns over the health of global banks, denting economic activity.

The saving ratio, the proportion of income left over after spending on goods and services, rose to 9.3% from 8.9%. That remains well above pre-pandemic levels and was boosted by government energy bills support. 

It could also suggest deepening consumer caution in the face of the political and financial turmoil that erupted late last year. When excluding pension entitlements, the rate rose to 2.8% from 1.7%.

“Households have a slightly larger buffer than we had expected to cope with rising interest rates,” said Ruth Gregory, economist at Capital Economics.

The services sector grew 0.1%, an improvement on the previous estimate of zero growth. The quarterly growth was driven by support services, with travel agents seeing a big boost as people made plans to get away.

Manufacturing also saw a big improvement, particularly in electronics, optical products, food, beverages and tobacco, after the ONS was able to analyse more granular VAT data. The revised figures meant manufacturing grew 0.5% in the quarter and output in the industry is now 3.6% above pre-pandemic levels, up from a previous estimate of 1.4%.

Lower Business Investment

There was a big downgrade to business investment in the final three months of the year, complicating the outlook. Instead of the 4.8% quarterly growth previously estimated, business investment shrank 0.2%. That left it 2.2% below pre-pandemic levels, when it was thought to have caught up. 

The revision could have implications for the government’s official forecasts, which were helped in the March budget by a better outlook for business spending.

The current-account deficit excluding previous metals narrowed to £21.1 billion, or 3.3% of GDP, in the fourth quarter, from £26.3 billion in the third. A slightly wider trade deficit was more than offset by a sharp increase in the surplus on investment income. 





–With assistance from Philip Aldrick and Lucy White.

(Updates with comment and context from first paragraph.)

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