- UK consumers deeply disappointed with finances and economic outlook
- The slump on the cost of living is the worst among major European economies
- Economists blame relative lack of household support
- Data suggests there is an urgent need for the government to change course
- Targeted household support could have wider benefits
LONDON, May 11 (Reuters) – The wave of pessimism sweeping through British households is unmatched elsewhere among major European economies and suggests the government may have misjudged its response to the growing cost of living crisis.
Finance Minister Rishi Sunak has so far resisted calls to extend support measures for households, saying he would review the situation in the second half of the year when energy prices are expected to rise again.
Some of the economic data, however, suggests that a more urgent approach might be warranted.
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Last month, the closely watched GfK survey showed public confidence in personal finances had fallen to its lowest level since records began in 1985, with sentiment about the economic outlook also approaching historic lows. .
That was before last week’s stern warning from the Bank of England that Britain risked a double hit of inflation above 10% and a possible recession as the BoE hiked interest rates. interest at their highest level since 2009. read more
As people across Europe face their highest inflation rates in decades – reflecting pandemic-damaged supply chains and soaring energy prices – and consumers turn glum in developed economies, an outright collapse of confidence is an acute British problem.
Unadjusted comparable data from the European Commission’s monthly consumer survey – which included the UK‘s GfK survey before Brexit – shows there is more pessimism in Britain about household finances and the economy. economy at large than in any of the 10 largest economies in the EU.
If all EU countries are included, only Greek consumers were more depressed.
The Refinitiv/IPSOS consumer survey paints the same picture: Britain is bottom of the table in Europe for confidence in finances.
Economists say this reflects a relative lack of support from the Conservative government for British households who are this year the hardest hit by their incomes since the mid-1950s.
“If you compare the UK to the other big countries in Western Europe like France, Italy, Germany… they’ve done more to support consumers over the past few months,” said James Smith, an economist for developed markets at ING.
France has pledged to cap an increase in regulated electricity costs at 4% – unlike the 54% increase in its regulatory price cap in Britain which came into force in February, affecting some 22 million of people. The UK cap is set for another sharp rise in October.
Germany has announced two tax relief and subsidy programs worth a total of more than 30 billion euros ($31.6 billion).
Spain cut taxes to lower consumer bills and announced €16 billion in direct aid and subsidized loans to help businesses and households cope with rising energy prices. Read more
Britain says it is providing support worth £22bn ($27.1bn) in the 2022/23 financial year to households – but that ignores previously announced tax increases for workers.
The Resolution Foundation, a living standards think tank, estimates UK support for 2022/23 will be net at just £110 per household, after tax increases.
British consumer confidence now languishes at levels that reliably indicate a recession.
While business surveys and labor market data show a healthier picture of the economy – one of the reasons the BoE raised interest rates – this was also the case in the first half of 2008 when a severe downturn followed.
A repeat could spell trouble for Prime Minister Boris Johnson ahead of an election due in 2024. On Tuesday he pledged to boost Britain’s economic growth to help those battling the rising cost of living. Read more
SHOW ME THE MONEY
Sunak stresses the need to restore Britain’s public finances after borrowing the most ever in peacetime during the COVID-19 pandemic. He says he must reduce the debt burden for future generations and make room for future stimulus if needed.
Last month the International Monetary Fund said Britain was on track to record a lower budget deficit in 2023 than most major developed economies – but would also suffer from the weakest economic growth and the highest inflation.
Prime Minister Johnson has warned that doing more now to help households with rising energy bills could further fuel inflation – a proposal which Resolution Foundation chief executive Torsten Bell has called ‘seriously absurd’ .
The government should provide targeted support to the lowest income households, he said.
“(It’s) true that you can’t stop rising gas prices from making us poorer as a country,” Bell said. “But the idea that you can’t make choices about whose standard of living it impacts is ridiculous.”
Economists say this focus on spending restraint could now be at the heart of Britain’s problems, potentially creating a toxic policy mix.
When Britain passed an austerity plan to rein in government borrowing after the 2008-09 financial crisis, it relied on the BoE to keep stimulating the economy – no longer an option with double-digit inflation.
“We’ve been consistent for a while in saying we think the policy mix is wrong and fiscal policy is too tight,” said Rory Macqueen, senior economist at the National Institute for Economic and Social Research.
The thinking is this: the government should spend more, especially to help low-income households through the cost of living crisis.
With fewer concerns about the impact of demand and a possible recession averted, the BoE would be able to raise interest rates further, boosting the pound – which has slid to a low nearly two years below. of $1.23 in recent days – and dampening inflation.
“There’s a lot more that could be done within the confines of fiscal policy to support households,” Macqueen said.
But when the government presented its legislative program for the next legislature on Tuesday, there was no sign of changing course – although it said it would not hesitate to take further action to help households if necessary.
“Clearly the government is the best placed agent to ensure that households don’t suffer, and they don’t,” Macqueen said.
($1 = 0.8118 pounds)
($1 = 0.9486 euros)
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Editing by Mark Heinrich
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