Britons See Disposable Incomes Plunge Most Since 1977: Economy

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A pedestrian looks at the window display of a store advertising a closing-down sale in the Kingston, U.K. Close

A pedestrian looks at the window display of a store advertising a closing-down sale in the Kingston, U.K.

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Photographer: Jason Alden/Bloomberg

A pedestrian looks at the window display of a store advertising a closing-down sale in the Kingston, U.K.

Britons suffered the biggest drop in disposable income in more than three decades last year in a squeeze that may continue this year as energy prices increase.

Real household disposable income fell 1.2 percent, the Office for National Statistics said today in London. That’s the biggest drop since 1977 when the then Labour government sought to cap incomes growth in an attempt to bring down inflation. The report also showed that the economy shrank 0.3 percent in the fourth quarter, more than the 0.2 percent contraction previously estimated.

The Bank of England has said cooling inflation will ease the squeeze on consumers this year and help the economy to recover from the second half. While Chancellor of the Exchequer George Osborne raised the threshold before workers begin paying income tax in his budget last week, any spending pickup may be constrained by rising unemployment and higher gasoline prices.

“We expect that real incomes will fall again this year, reflecting low nominal wage growth and little or no job growth,” said Michael Saunders, an economist at Citigroup Inc. in London. “Consumer spending is likely to remain subdued for several years.”

The drop in 2011 disposable income followed a 0.2 percent decline in 2010, marking the first back-to-back fall in real incomes since the early 1980s recession.

Consumer Spending

The ONS report showed consumer spending rose 0.4 percent in the fourth quarter, less than the 0.5 percent previously estimated. Real household disposable income fell 0.2 percent in the quarter, the second successive quarterly decline. The savings ratio -- the share of post-tax income put aside -- fell to 7.7 percent from 7.9 percent.

While U.K. inflation has eased to 3.4 percent since reaching 5.2 percent in September, that’s still above the Bank of England’s 2 percent target. It’s also faster than wage growth, which was 1.4 percent in the quarter through January. Justin King, chief executive officer of J Sainsbury Plc (SBRY), the U.K.’s third-largest supermarket owner, said on March 21 that the “economic climate is likely to remain challenging.”

The statistics office also said services fell 0.1 percent in the fourth quarter, with declines in all sectors except government services. Services output was previously estimated to be unchanged. Manufacturing fell 0.7 percent and total industrial production declined 1.3 percent. Construction fell 0.2 percent, less than half the pace first thought.

A separate report showed the current-account deficit narrowed to 8.5 billion pounds in the period.

Investment Incentive

With the government constrained by its pledge to rid Britain of the bulk of its budget deficit by 2017, Prime Minister David Cameron is counting on exports and investment to drive the recovery.

The economy received a boost from net trade in the fourth quarter. Business investment fell 3.3 percent, less than the 5.6 percent fall previously estimated. With prospects in the U.S. and the euro region brightening, Osborne last week sought to persuade companies to spend rather than hoard their surplus cash by cutting the tax rates on corporate profits and high personal incomes.

Recent figures suggest the economy returned to growth in the first quarter, with the chancellor saying yesterday saying Britain was now “in the recovery phase.” He used his March 21 budget to spur businesses to invest and hire by cutting taxes for companies and high earners.

“Things are going to pick up in the first quarter,” said Brian Hilliard, an economist at Societe Generale SA in London and a former Bank of England official. “The key aspect of GDP this year is going to be its immense volatility.”

Euro-Area GDP

The pound stayed lower against the dollar after the report and was trading at $1.5927 as of 11:16 a.m. in London, down 0.1 percent on the day. Gilts rose, with the yield on the 10-year government bond down 1 basis point at 2.25 percent.

French gross domestic product rose 1.3 percent in the fourth quarter from a year earlier, instead of the 1.4 percent previously estimated, statistics office Insee said today. Its estimate of growth from the previous quarter was unchanged at 0.2 percent.

Growth in the euro area has been constrained by the debt crisis, which has undermined confidence and led to bailouts of three nations. Italian Prime Minister Mario Monti said today that the region’s woes are “almost over” after a slow initial response by policy makers, while German Chancellor Angela Merkel said yesterday that the crisis is ebbing.

Opportunities

Still, Bank of England Governor Mervyn King said the euro region must still deal with underlying problems and that the liquidity support from the European Central Bank has only bought time.

“The difficulty is that windows of opportunity have been created regularly for over two years, and nothing seems to have gone through the window,” he said. “But hope springs eternal. I don’t know whether they will take advantage of it or not.”

Asian policy makers are preparing to double a $120 billion reserve pool to defend the region against shocks, reducing reliance on traditional backstops such as the International Monetary Fund as Europe saps resources. Officials meeting this week will discuss boosting the so-called Chiang Mai Initiative Multilateralization agreement, a foreign-currency reserve pool created by Japan, China, South Korea and 10 Southeast Asian nations that took effect in 2010, said Wei Benhua, director of the fund’s surveillance unit in Singapore.

The financial crisis and Europe’s debt turmoil “show that when markets become irrational or extremely volatile, countries need all the resources they can get,” said Tai Hui, Singapore- based head of Southeast Asian economics at Standard Chartered Plc.

U.S. Durable Goods

U.S. orders for durable goods probably rebounded in February as aircraft demand surged, economists said before a report today. Bookings for goods meant to last at least three years rose 3 percent after dropping 3.7 percent the prior month, according to the median forecast in a Bloomberg News survey. Excluding transportation equipment, demand climbed 1.7 percent after falling 3 percent, economists projected.

The U.K. Treasury’s fiscal watchdog predicts Britain’s economy will expand just 0.8 percent this year, with growth stalling in the second quarter because of an extra public holiday to mark Queen Elizabeth II’s 60 years on the throne.

With U.K. unemployment at a 16-year high and forecast to rise further, two of the Bank of England’s nine policy makers, David Miles and Adam Posen, wanted to increase stimulus this month.

Osborne claimed vindication for his budget after GlaxoSmithKline Plc (GSK) announced plans on March 22 to create more than 1,000 jobs in Britain. EnQuest Plc (ENQ), a North Sea oil company, said yesterday it will invest more in the U.K. after Osborne promised to guarantee tax breaks for dismantling platforms and developing new fields.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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