Clouds Continue to Lift Over Financial Outlook

July 23, 2012 /

The Markit Household Finance Index (HFI) rose for the second month running to 37.5 in July, from 37.0 in June, still below the neutral 50.0 value, but nonetheless indicated the slowest deterioration of household finances since March.

Around 32% of respondents reported that their household finances worsened in July, compared to 7% that signalled an improvement. A slower deterioration in household finances during July was mainly driven by less downbeat sentiment among people over 55 years old.

Respondents in this age category noted the least marked worsening of their finances in the survey’s three-and-a-half year history. This cohort are most likely to be living on fixed incomes, and these households will have been especially relieved by lower inflation in recent months.

Moreover, people in the oldest age group are more likely to own their home outright. In turn, this means they are less likely to have been hit by either higher mortgage payments or increased rental costs (mortgage holders and private renters both saw steeper declines in their finances in July).

July data indicated that household finances were supported by a marked fall in inflation perceptions, which in turn led to the slowest drop in cash availability for 19 months. This contributed to a weaker rise in debt levels and supported household savings in July. However, spending only increased marginally and households’ appetite for major purchases worsened since June, in part reflecting deteriorating job security and lower income from employment.

At 43.1 in July, up from 42.8 in June, the index measuring households’ expectations for their finances over the year ahead was the highest since April 2010. Although the latest reading was still below the 50.0 mark, the index has now pointed to a lesser degree of financial pessimism in each of the past three months.

Almost 43% of households anticipate that their finances will deteriorate in the next 12 months, compared to 29% that foresee an improvement. Reduced levels of pessimism since June were primarily driven by private sector employees – only 37% of private sector workers expect that their finances will worsen during the year ahead, compared to 52% of public sector employees.

By region, people living in Wales are the most pessimistic, while households in London are the least downbeat.

July data indicated that households’ current inflation perceptions eased since the previous month, continuing the downward trend seen since April. At 82.9, down from 85.1 in June, the index measuring current inflation perceptions was the lowest since October 2010. Moreover, the survey was compiled before the release of official consumer price inflation (CPI) data for June, which showed a sharp fall to 2.4%, from 2.8% in May.

Despite signs of slowing price pressures, inflation expectations picked up again in July. The index measuring households’ inflation expectations for the year ahead rose for the fourth time in the past five months.

The index measuring households’ cash available to spend rose from 35.5 in June to 37.1 in July, to signal the least marked squeeze since December 2010. People in the oldest age group (55+ years) reported the slowest decline, and the rate of reduction was the least marked since the survey began in February 2009. By housing category, respondents that own their home outright also noted the weakest squeeze on cash availability in the survey’s three-and-a-half year history.

The latest survey pointed to generally unfavourable labour market trends in July, as highlighted by job security deteriorating at a faster pace than in the previous month. London was the main exception to this trend, with job security declining at the slowest pace for two-and-a-half years, most likely reflecting hiring related to the upcoming Olympics. July data also showed that job security fell in the public sector at the sharpest pace for four months, while the rate of deterioration was largely unchanged among private sector employees.

Income from employment dropped moderately during July, while respondents pointed to only a slight increase in workplace activity. Reduced income contributed to a further rise in debt levels, alongside the second-fastest drop in households’ willingness to make major purchases recorded so far this year.

Tim Moore, Senior Economist at Markit and author of the report said: “Households were less pessimistic about their
financial outlook in July, with reduced inflation helping ease the strain on budgets. Cash availability was squeezed to a much lesser degree, as the wash-out weather encouraged retailers to bring forward their seasonal sales.

“Inflation has fallen more quickly than expected over the summer, but this is cold comfort for many households given continuing weak pay trends. An unfavourable labour market remains the fly in the ointment, causing deeper aversion to major purchases and only marginal growth in actual spending. Job insecurities and lower incomes are
crimping underlying consumer demand, which adds to recent gloom over the wider UK economic outlook.”


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