Squeeze on Household Finances Is Least Marked for 20 Months

August 21, 2012 /

The Markit Household Finance Index (HFI) rose for the third month running in August, to 38.9 from 37.5 in July. This signalled the slowest deterioration of household finances since December 2010.

Just under 30% of respondents saw their finances worsen in August, while less than 8% reported an improvement.

Latest survey data suggested that a raft of welcome developments helped to lessen the strain on household finances. These included a stabilisation of debt levels for the first since early 2011, lower
inflation perceptions during recent months, a smaller squeeze on income from employment and reduced levels of job insecurity.

However, household spending was relatively muted in August, rising at the slowest pace for five months. Moreover, the balance of households
reporting an expansion in spending was the lowest for any August since the UK economy was just starting to climb out of recession in 2009.

A further sign of underlying fragilities in household finances were the faster declines in both savings levels and cash available to spend during the latest survey period.

Households were again less pessimistic about the outlook for their finances over the next 12 months. The index rose for the fourth month
running to 43.5 in August, from 43.1 in July, which signalled the least marked degree of negative sentiment since March 2010.

Just under 42% of households anticipate that their finances will deteriorate over the next 12 months, compared to 29% that expect an improvement. August data indicated that sentiment was strongest
among IT/Telecoms workers, followed by those working in Finance/Business Services.

Meanwhile, manufacturing and construction employees are the
most downbeat about their financial outlook.

The latest index reading for people working in the public sector (38.2) was more downbeat than the equivalent for private sector workers (47.2), thereby continuing the trend seen since May 2010.

A similar divergence was seen for income expectations for the year ahead. Around 39% of private sector employees expect a pay rise in the next 12 months, compared to just under 25% of public sector workers.

Mirroring the trends for finances, IT/Telecoms staff are the most upbeat about the outlook for their pay levels, while construction employees are the most downbeat.

August data indicated that households’ income from employment dropped only marginally, and at the slowest pace since July 2011. People working
in the private sector signalled a stabilisation in their pay levels, while incomes fell in the public sector for the twenty-second month running.

Although falling job security persisted in August, the latest reduction was less marked than during the previous month and the joint-slowest since February 2010. Moreover, private sector job insecurities were the least marked since May 2010.

Construction workers were the main exception to the overall trend in August, indicating a much more marked degree of job insecurity than in July. A slower reduction in income from employment contributed to a stabilisation of household debt during August, thereby ending a 16-month period of increase.

Private sector workers continued to fare best in August, with debt levels falling at the steepest pace for almost two years. There was nonetheless a wider divergence between income groups – the lowest saw the fastest rise for eight months, while the highest income group paid off debt at the quickest pace since September 2009.

Households’ current inflation perceptions remained much lower than the highs seen before the summer. However, the index measuring current inflation perceptions edged up to 83.3, from July’s 21-month low of 82.9.

The survey was compiled before the release of official consumer price
inflation (CPI) data for July, which showed a rise to 2.6%, from 2.4% in June.

Despite the slight rise in perceptions of price pressures, inflation expectations declined during August. At 90.9, down from 92.4 in July, the index measuring households’ inflation expectations for the year ahead was the lowest since February.

A general moderation in inflation perceptions since earlier in the year could not prevent a further sharp squeeze on cash availability in August. Almost four times as many households (37%) noted lower cash available to spend as those that that reported a rise (10%).

This meant that the index measuring households’ cash available to spend posted 36.6, down from July’s 19-month high of 37.1 and well below the neutral 50.0 value. Meanwhile, households’ appetite for major purchases
continued to decline, albeit at a slower pace than that recorded during the previous month.

Tim Moore, Senior Economist at Markit and author of the report said: “Team GB may have finished their quest for gold but, with the clouds lifting over the financial outlook, there’s still something for households to cheer. While the Olympics perhaps helped give a warmer
glow to household morale, the breadth of improvement spanning debt trends, inflation expectations, incomes and job security points to a
more fundamental easing of the financial downturn.

“Indeed, the overall strain on finances was the least marked since December 2010, and hopes of a reduced squeeze on real incomes meant that
households are the least downbeat about the financial outlook for almost two-and-a-half years.

“The drop in inflation expectations to a six-month low will also be welcome news for ‘Team MPC’, especially after the surprise acceleration in consumer prices during July pulled inflation further above target. Less welcome will be the muted household spending patterns shown by August’s survey, which add to concerns about worsening business conditions at home and in key export markets.”


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