£220bn setback to economy as households cut spending

Ahead of the Budget, Which? reveals that on average each household has reduced their spending by over £3,000 a year since 2007, dealing a devastating blow to the economy and threatening a return to growth.

As fears of a triple-dip recession grow, new Which? analysis of official data shows that on average each household has spent £3,150 less a year, over £12,000 in total, since the beginning of the financial crisis.

Of this £3,150 reduction in consumer spending, £1,750 is spending on discretionary, non-essential goods and services, which has fallen three times as much as essential spending on items such as food, energy and housing. The fall in discretionary spending has left a huge £136 billion dent in the economy.

Non-essential, discretionary spending currently accounts for 25% of total GDP. New analysis shows how significant the fall in discretionary spending has been during the financial crisis, contributing 1.6 percentage points to the 1.9% fall in GDP between 2007 and Q3 2012.

This fall in spending by consumers facing a squeeze on incomes and low in confidence has had a huge knock on effect on the economy. For example, official data shows that since 2007 consumers have cut annual spending on eating out by £13 billion. This coincided with a 10% reduction in output in the restaurant and catering industry with 90,000 fewer people employed in the industry.

New Which? research also finds that more than two million households are at a critical stage of squeeze and have defaulted on a housing or bill payment in the last two months, while many more are struggling to cope with the strain on their budgets.

Which? executive director Richard Lloyd said:

“The squeeze on incomes and collapse in consumer confidence has led households to slash their spending during the financial crisis, with a devastating impact on the wider economy. The longer the squeeze goes on, the longer this spending setback will continue.

“The UK has never before come out of recession without an increase in consumer spending, so it is critical that the Chancellor puts consumers at the heart of his plans for a return to growth.”

The Which? Squeezometer also shows that:

  • Over a third (36%) households are feeling the squeeze in some way.
  • Nine million households, over a third (36%), are cutting back on essential spending.
  • Three and a half million households (14%) are cutting back and getting into debt.
  • Over two million households (9%) are cutting back and have defaulted on a housing or bill payment.
  • Out of all age groups young people are experiencing the most financial difficulty (40%) and people with children are experiencing the squeeze more than those without (45% compared to 31%).

 

Notes to editors:

  1. Which? commissioned the Centre for Economics and Business Research (Cebr) to look at the effects of the decrease in discretionary and non-discretionary spending on GDP.
  2. The terms ‘discretionary’ and ‘non-discretionary’ were defined by the ONS in their report ‘The impact of the recession on household spending’ (see table below). The Cebr model used data from ONS’s Q3 2012 Consumer Trends.
  3. If spending rates seen in Q4 2007 had remained the same throughout the financial crisis then a total of £220 billion more would have been spent. These figures are in real terms in 2009 prices. During the same period, if discretionary spending rates had remained the same then consumers would have spent up to £136 billion more throughout the financial crisis.
  4. The average household has spent £12,000 less in total since 2007 – this is £3,150 a year, of which £1,750 is discretionary spending, £1,100 is non-discretionary spending by and £300 is semi-discretionary spending a year. The figures were calculated by looking at consumers’ spending rates before the financial crisis and projecting what would have been spent if spending rates had continued at that rate.
  5. Spending on discretionary, non-essential goods and services has fallen three times as much as essential spending during the financial crisis – discretionary spending has fallen 9% and non-discretionary spending has fallen 3%. Source: The 2012 ONS report: ‘Impact of the recession on household spending’.
  6. Consumer spending is the largest aspect of UK GDP making up 60.4% of total spending in the economy in 2012. (Cebr analysis of ONS data).
  7. Discretionary spending dropped in real terms from £97 billion in Q3 2007 to £87 billion in Q3 2009 – a decline of 10.3% in two years, and has hovered around or below £90 billion a quarter since then.
  8. Discretionary spending has contributed 1.6 percentage points of the 1.9% fall in GDP between 2007 and Q3 2012. This is the change in GDP from the average rate in 2007 to Q3 2012.
  9. Separately Which? carried out statistical analysis on how consumers are reacting in the face of the difficult economic situation, using January and February 2013 data from our monthly Consumer Insight tracker. Every month, Which? conducts an online survey of more than 2000 UK adults from across the country asking them about their finances and wellbeing.  Data are weighted to be demographically representative of all UK adults.
  10. The Which? Squeezometer: is based on the Which? Consumer Insight Tracker Poll and categorises groups financial difficulties into a series of five graded levels. Respondents are classified according to the most severe difficulty they said they have experienced.
  • Level 1 – Reducing spend on essential items
  • Level 2 – Reducing spend on essential items and taking money out of savings
  • Level 3 – Reducing spend on essentials and took out a loan or credit card, borrowed from friends / family or took out an authorised credit card
  • Level 4 – Reducing spend on essentials and took out an unauthorised overdraft or payday loan
  • Level 5 Reducing spend on essentials and defaulted on a bill, rent or mortgage payment

ONS Categorisation of spending:

Non-discretionary spending (essential): Bread and cereals, Meat, Fish, Milk cheese and eggs, Oils and fats, Fruit, Vegetables, Other food products, Coffee tea and cocoa, Fruit and vegetable juices and other soft drinks, Housing, water, gas, electricity, and other fuels, Repair of household appliances, Non – durable household goods, Social protection, Dwelling insurance, Transport insurance, Financial services.

Semi-discretionary spending: Clothing and footwear, Major household appliances electric or not, Therapeutic appliances and equipment, Purchase of vehicles, Operation of vehicles, Passenger transport by railway, Passenger transport by road, Other products for personal care, Other services.

Discretionary spending: Sugar confectionery and ice cream, Alcoholic beverages and tobacco, Furniture and furnishings, carpets and other floor coverings, Household textiles, Small electric household appliances, Glassware tableware and household utensils, Tools and equipment, Domestic and household services, Pharmaceutical products, Other medical products, Out-patient services, Hospital services, Air transport, Water transport, Other transport, Communication, Recreation and culture, Education, Restaurants and hotels, Hairdressing, Electric appliances for personal care, Personal effects, Life Insurance, Health insurance, Other insurance.


 

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