Lloyds TSB’s latest Spending Power Report indicates that, after inflation, spending power fell to -1.1% in February, meaning consumers had the equivalent of approximately £10 less a month to spend on non-essential items.
This is the second consecutive month spending power has been in negative territory and suggests an increased squeeze on household budgets since the turn of the year.
A rise or fall in one point equals a reduction or increase of £113 per annum to consumers’ spending power – just short of £10 per month (£9.41).
As seen in recent months, weak income growth and high inflation continue to be the main determining factors placing downward pressure on consumer spending power. However, many consumers are also mindful of what impact the Budget might have on their future personal circumstances. Consumer research, compiled in conjunction with TNS Financial and Professional Services, shows that 55% of people surveyed believe they will have less money to spend each month post-Budget, while just 6% expect to have more. Within this, there is a clear distinction between age groups, with 46% of those aged 18-34 saying they expect to be worse off compared to 61% of 35-64 year olds.
To further compound concerns, annual spending growth on essential items increased in February (2.6%) compared with January (2.4%), although still remains significantly lower than the 4.6% growth seen at the same time last year. Annual spending growth on food and drink – the largest component within the essential spending category – rose to its highest level for six months at 3.8% year-on-year. Conversely, February recorded a continuing decline in spending on debt payments (-1.3%), helping to relieve some of the pressure on budgets.
Patrick Foley, chief economist at Lloyds TSB, said: “Household budgets remain under pressure. Growth in spending on essential items remains stubbornly high despite the weakness in the economy, with food and drink spending again the largest driver of the squeeze.
“Consumers don’t expect any relief from the Budget, and the recent fall in the exchange rate is likely to add to pressures. Consumer spending is therefore likely to remain weak through the first half of 2013 at least, keeping recovery in the wider economy far from assured.”
Perceptions towards the UK’s overall financial situation deteriorated slightly in February, with those saying that it is ‘not at all good’ increasing by four percentage points to 43%. This reverses some of the gains seen in January when there was a seven percentage point shift away from those expressing the most negativity, to 39% from 46% in December 2012. Women were more negative about the economy in February with nearly half (47%) saying the situation is ‘not at all good’ compared with 39% of men. The percentage of people who feel positive about the economy remained steady month-on-month at 11%.
However, this pessimism is not fully reflected in the way consumers feel about their own finances. February saw a five percentage point increase in the number of people who think their situation is ‘somewhat good’, ‘very good’ or ‘excellent’. This figure now stands at 54% compared to 49% in January.
Similarly, sentiment towards the housing market reached its highest level for over two years in February, with 25% saying they believe the housing market to be at least ‘somewhat good’. While still subdued, this is up two percentage points on January (23%) and six percentage points higher than February 2012 (19%).
For the second consecutive month there has been a marginal uplift in those saying they expect to have more money in six month’s time, although this is still outweighed by those expecting to have less. The balance of opinion on future discretionary income (the difference between those saying they will have more and those saying they will have less in six months time) now stands at -2%, the closest this measure has been to positive territory since the study began (November 2010).
Similarly, the balance of opinion with regard to saving (the difference between those saying they will save more minus those saying they will save less) increased by four percentage points to 5% in February, with 25% saying they will be able to save more in six months’ time compared to 20% who believe they will save less.