Analysis: what is the outlook for our standard of living amid a 'snakes and ladders' economic backdrop?

Consumers have been opening their wallets with greater ease, according to new data taking the pulse of the UK economy – but amid a rather more dreich backdrop, to what extent has our overall standard of living been dampened, and what is its outlook?

The cost-of-living crisis is really hurting families, particularly those on the lowest incomes who are often forced to take on debt just to keep up with essential bills, says Citizens Advice Scotland. Picture: Getty Images/iStockphoto.

The UK’s gross domestic product (GDP) increased by 0.2 per cent in April after a 0.3 per cent fall the previous month, the Office for National Statistics (ONS) has just revealed, partly caused by a recovery in consumer-facing services, as Britons spent more on drinking and eating out. "It appears that consumers are drowning their sorrows,” said Richard J Hunter, head of markets at Interactive Investor.

ONS director of economic statistics Darren Morgan noted that bars and pubs had a comparatively strong April, while car sales rebounded, and the overall services industry grew by 0.3 per cent for the month, as it recovered from a 0.5 per cent decline in March.

So far, so positive, but many millions of people are facing their mortgage, rent, and/or other credit costs stepping up amid interest rates expected to move even higher from the current level of 4.5 per cent – with Threadneedle Street’s next decision on this next week – and even reach 5.5 per cent or even higher within months according to some predictions.

People drinking in Old Compton Street in Soho, central London, where streets have been closed to traffic to create outdoor seating areas for the reopening bars and restaurants as England takes another step back towards normality with the further easing of lockdown restrictions. Picture date: Monday April 12, 2021.

Jonathan Haskel of the Bank of England’s monetary policy committee recently wrote in The Scotsman about the need to rein in inflation, which is currently at 8.7 per cent. In terms of interest rates, “my own view is that it’s important we continue to lean against the risks of inflation momentum, and therefore that further increases in interest rates cannot be ruled out – as difficult as our current circumstances are, embedded inflation would be worse”.

And there is much gloomy data on how consumers struggling to pay for essentials, with news of shops selling instant coffee in security cases one grim reflection of food price inflation. Additionally, advice regarding food banks and housing having both jumped by 11 per cent in the year to April across the Citizens Advice network, for example, Citizens Advice Scotland (CAS) revealed earlier this month.

Struggle

CAS chief executive Derek Mitchell has now told The Scotsman: “The [Citizens Advice Bureau (CAB)] network in Scotland sees people every day who just can’t make ends meet. The cost-of-living crisis is really hurting families all across the country, particularly those on the lowest incomes who face impossible choices on spending, and often find themselves forced to take on debt just to keep up with essential bills. More targeted support towards people is essential, as is more support for services on the frontline of this crisis like CABs.”

Furthermore, the Joseph Rowntree Foundation earlier this year said 29.1 per cent of people in the UK were living in households with incomes below the minimum income standard, enabling them to live “with dignity”, in 2020-21, up from 26.7 per cent in 2008-09.

Also providing comment was Luke Bartholomew, senior economist at Edinburgh-headquartered investment giant Abrdn, who has now noted that economic headwinds have been gaining speed for some time. “Real, inflation-adjusted living standards have been squeezed sharply over the last few years as high inflation has eroded incomes,” he said. “Despite this squeeze, the economy has so far avoided a technical recession by the skin of its teeth.

"This is partly due to the government’s energy price scheme and the recent fall in wholesale energy prices, but also because of the savings buffers many households were able to accumulate during the pandemic. But the stock of excess savings is being run down over time, meaning there is only so long they can provide a prop to the economy.

"And the impact of monetary tightening on mortgages is only now starting to bite with earnest, as mortgages that were fixed at much lower interest rates start to roll off and face much higher re-financing costs. Given this backdrop, it is hard to see the economy avoiding a recession. Indeed, it seems increasingly likely that a recession is necessary to finally get inflation back under control. So unfortunately living standards might get worse before they get better."

Stark

And Kevin Brown, savings expert at Scottish Friendly, also addresses the picture over recent years. “Since the end of the pandemic, many of us have been faced with the stark reality that our standard of living has worsened, at least in the short term. As prices rise faster than income, and interest rates creep upwards to try and offset inflation, that double whammy makes it inevitable that our money won’t be able to stretch as far as it once could.”

However, he believes the picture is not all bad, saying the fall in living standards “probably feels more like snakes and ladders than a short, sharp shock”. He also said: "Debate about whether the UK economy will shrink remains divided as we skirt around the edges of a recession. What is certain is that inflation is stickier than policy-makers had previously imagined – and a series of geopolitical and macro-economic uncertainties since Covid-19 continue to play out in food and energy prices.

“Against that uncertain backdrop, households still have to plan. While the ladder of a 7.2 per cent rise in basic wage growth reported by the ONS earlier this week could be seen as good news, the snakes of 8.7 per cent inflation and the spectre of a Bank of England base rate hitting 5.5 per cent this year probably means many of us aren’t as far along the board as we would like to be. And progress may slow further as more of us can add the spiralling cost of mortgages and private rents to our list of money worries.”

But giving cause for optimism is YouGov and the Centre for Economics and Business Research revealing that consumer confidence increased from 101.3 to 103.3 in May, dubbed appropriately by some as the “month of maybes”.