While arguments continue to rage over the pace of economic cuts in the UK, the Centre for Economics and Business Research (Cebr) has described the situation as the ‘biggest peace-time squeeze on household disposable incomes since 1921′ – with families expected to be £27.3bn ($44.6bn) worse off this year than in 2009 – a fall of £911 ($1,490) per household.

The impact on discretionary spending – including travelling and vacations – is expected to be severe. Updated Cebr forecasts suggest that real household disposable incomes are down by 2.0% so far in 2011. 

The Cebr says its forecasts show that considering the 0.8% fall in incomes recorded in 2010, its new estimates show that the UK is now seeing a bigger fall in real household disposable incomes than in the 1930s and the biggest fall excluding WW2 and the General Strike in 1921. 

In a statement, the Cebr said: “This means that households will have £27.3 billion less spending power in 2011 than in 2009 – a fall of £910 per household. 

HIGH INFLATION AND WEAK EARNINGS
“The fall in real disposable income is a result of high inflation and weak earnings growth. Cebr expects the annual rate of inflation across 2011 as a whole to come in at 3.9%, the highest since 1992, while earnings growth will edge up to 1.9%, as unemployment remains high. The high rate of inflation is mainly a result of surging global commodity prices and the rise in VAT in January. 

“Rising prices of energy, cotton, metals and other raw materials and food are the major factor, caused by a combination of supply-side shocks and strong demand from emerging markets. By comparison, public spending cuts are only a minor element in the squeeze on household incomes.” 

The Cebr says that the squeeze on disposable income is the main reason why it is forecasting much lower GDP growth than the forecasts from the Office for Budget Responsibility (OBR) that were released with the UK Budget. 

It is now forecasting that consumer spending will decline by 0.8% this year whereas the OBR forecasts 0.6% growth. 

SUBDUED GDP GROWTH AHEAD
It adds that the ‘flurry of retailers’ reporting profit warnings lately supports the more cautious forecast. 

Scott Corfe, Cebr Economist and main author of the report comments: “The unprecedented peace-time squeeze on real household incomes, combined with more realistic forecasts for exports and investment growth than the OBR, means that GDP growth will be subdued for the next two or three years, though we expect growth to accelerate towards 2015.”