Data shows long-lasting decline in living standards as Bank of England chief hints that UK is emerging from recession
A mix of deep recession and high inflation has left national wellbeing in Britain more than 13% down on its level before the global financial crisis, according to new government data.
The Office for National Statistics (ONS) said the hit to real living standards caused by the worst downturn of the postwar era had been almost double the fall in national output as measured by gross domestic product (GDP).
The governor of the Bank of England, Sir Mervyn King, dropped a broad hint on Tuesday night that the latest growth figures due out on Thursday would show the UK was about to emerge from its double-dip recession.
However, data released by the ONS on wellbeing showed that net national income per head (NNI) – considered to be the best guide to real living standards – held up in the early stages of the recession but has continued to drop as a result of the squeeze on family budgets from rising prices.
The ONS said that NNI per head fell by 13.2% between the first three months of 2008 – when the economy peaked – and the second quarter of 2012. Over the same period, GDP per head fell by 7%.
The figures indicate that the political battles over the “squeezed middle” will continue in the runup to the next election. Even if the data is adjusted to include the welfare state – especially important in Britain with the NHS – it still reveals a bleak picture. This figure, known as real household actual income per head, dropped in the second quarter of 2012 by 2.9% below its peak in the third quarter of 2009.
Labour MP Catherine McKinnell, a shadow Treasury minister, said: “These figures show how the recovery from the global financial crisis we had two years ago has gone into reverse under this government. Families and pensioners are worse off because of the lack of jobs and growth under David Cameron’s failing economic plan.”
According to the study, the decline in living standards has been more pronounced and longer lasting than in the UK’s two previous recessions in the early 1980s and early 1990s.
NNI dropped by around 6% in the slump of the early 1980s, but was back to its pre-recession peak within three years. In the early 1990s, the decline was a more modest 4%, and the lost ground had been recouped in two and a half years. The ONS said the latest recession’s longer decline “was partially a result of unemployment not rising to the same extent as in the previous recession, and historic low interest rates reducing mortgage payments for those on tracker mortgages”.
“In contrast to the recovery from the 1990s recession,” it said, “as the economy emerged from the contraction that started in 2008, real household incomes began to fall; a downwards trend that continued to the start of 2012. The cause of this fall was primarily due to an increase in prices, such as fuel, utility bills and food.”
The data release marks a significant shift in the view of how UK economic changes affect people’s wellbeing.
Since 2008, when a report for the French government by economists Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi argued that governments should look at people’s income and consumption to evaluate their “wellbeing” rather than at production to assess progress, countries have begun to use such measures to size up a nation’s happiness.
As the ONS admits: “GDP was not designed as a measure of individual or national wellbeing … Living standards are more closely aligned with net national income (NNI) (the total income available to residents of that country) as GDP can expand at the same time as incomes decrease and vice versa.”
Speaking in Cardiff, King said that despite the “probable” increase in GDP it was clear “that the recovery and rebalancing of the UK economy are proceeding at a slow and uncertain pace. At this stage, it is difficult to know whether some of the recent more positive signs will persist.”
He said the Bank’s nine-strong monetary policy committee would think “long and hard” before deciding next month whether to create more electronic money through quantitative easing, the programme under which Threadneedle Street has purchased £375bn of gilts. “But should those signs fade, the MPC does stand ready to inject more money into the economy”, King said, adding that there were no shortcuts to the necessary adjustment in the economy towards investment and exports.
He dismissed the idea of handing cash to the public in “helicopter drops” of money, describing it as a backdoor way of relaxing the government’s austerity strategy that risked either uncontrolled inflation or the eventual insolvency of the Bank of England. “The problems in the world economy mean that we shall have to be patient,” he said.
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