New forecasts by economics consultancy the Centre for Economics and Business Research (Cebr) – show that the UK economy will grow by 1.7% in 2017, only marginally behind last year’s 1.8% growth.

However, underneath this headline figure, which is bolstered by an improving outlook for exports, is a rapidly deteriorating picture for household finances, with real (inflation-adjusted) incomes set to fall for the first time in four years. Rising inflation and meagre earnings growth will combine to put a strain on household finances. Although poor wage growth has been a persistent characteristic of the entire post-financial crisis period (between 2001 and 2008 gross earnings grew by an average of 4.2% per annum, but in the 2009 to 2016 period this dropped to 1.6% annually) households have managed to keep up their spending in the last few years thanks to stable prices.Driven by higher input costs (partially a result of the weaker pound) and oil prices, inflation is on the rise. Cebr expects inflation to average 2.7% this year, above total earnings growth of 2.2%. This will make 2017 the first year since 2013 to see a fall in real incomes.

For the average UK household, this will translate to less money in their pockets. The average household disposable income across the UK was £35,300 in 2016. In 2017 we expect this to decline by £500 to £34,800.

The dynamics of higher prices and only marginally rising earnings will also be evident in the savings ratio. In 2017 we expect the average household to save just 4.0% of their disposable income. This is below the 2016 savings rate of 5.2% and the lowest annual value since comparable records began in 1963. Beyond 2017 we expect the saving rate to start rising gradually, however with interest rates set to stay low there is less of an investment to save, meaning that we are unlikely to see rates of above 5% in the medium term.

Nina Skero, Managing Economist at Cebr, said, “2017 is set to be a challenging year for household finances. Inflation is on the rise and it is particularly worrying that essentials such as housing, transport and food are getting more expensive. These concerns are compounded by the fact that despite record employment, wage growth remains exceptionally weak.”

“For the moment consumer confidence as measured by the YouGov/Cebr Consumer Confidence Index remains resilient, but below pre-Brexit levels. This optimism, however, is under threat as consumers start to notice rising prices. With fewer pounds left over for discretionary spending, households will approach purchases with greater caution. This creates a challenge for the economy as a whole, given that consumer spending has been a key source of growth in recent years”

Figure 1: CPIH annual inflation and year-on-year change in average total earnings, UK

Source: ONS

NB The 2017 figures are a Cebr forecast

Figure 2: Households saving ratio, seasonally adjusted, UK

 

Source: ONS

NB The 2017 figure is a Cebr forecast