This month Tony Hazell focuses on the effects of our current reluctance to spend
Have the tough economic conditions made you think twice about taking a holiday or improving your home? If so you’re in good company.
A recent survey claimed that 33 million Britons had "put life on hold". Some had put off retirement for five years while others had waited an extra two years before having their first child. Official figures show that families were hit by a bigger fall in their disposable income during 2011 than in any year since 1977.
The Office for National Statistics (ONS) said the drop was 1.2 per cent compared with 2010. This is only the eighth time disposable income has dropped since the ONS started keeping records in 1948.
The fall was blamed on a toxic mix of high inflation and low pay rises or freezes. What we all want to know is whether we are finally over the worst. The picture is far from clear.
Let’s get one more piece of bad news out of the way. The UK has once again entered recession. A recession is when the economy shrinks for two consecutive three-month periods. Provisional figures show the economy shrank by 0.2 per cent in the first three months of this year. This is in addition to the 0.3 per cent shrinkage in the last quarter of 2011.
The UK is currently experiencing a series of bank holidays which started at Easter and will finish with two days at the beginning of June to mark the Queen’s Diamond Jubilee. Believe it or not these holidays are expected to damage the UK’s economic output. Bank of England Governor Sir Mervyn King predicts a rerun of last year when he claimed the Royal Wedding of Prince William and Kate Middleton hit output.
Despite this the Bank still predicts growth overall of one per cent this year. This is slightly higher than the 0.8 per cent predicted by the Office for Budget Responsibility (OBR), the independent body that reports to the Treasury. Elsewhere inflation took a surprise upturn in March. The main measure known as the Consumer Prices Index, rose to 3.5 per cent from 3.4 per cent in February. Commentators expect inflation to return to its downward trend. But a deputy governor of the Bank of England has warned it may stay above three per cent this year.
At the time of the Budget, the OBR expected it to fall to 2.8 per cent this year and 1.9 per cent in 2013. The OBR also expects good news on jobs and is predicting a million more jobs will be created in the UK over the next five years.
Economists and governments often use terms such as GDP or borrowing targets when talking about the economy. I thought this month it would be worth looking a little more closely at what they mean.
Let’s start with the gross domestic product or GDP. This is basically the value of all the finished goods and services produced by a country in a year. And it’s this figure that is used when deciding whether an economy is growing or shrinking.
You could liken it to the total amount you and your family earn in a year. Or if you run your own business you could say it was the total amount it produces in a year. At home if you took a wage cut or lost your job, your own economic growth would be negative. If you got a pay rise it would grow.
Another figure often used is the national debt. This is the total amount the British government owes, and currently stands at just over £1 trillion (£1,000 billion). But if you add in the money used to support the financial sector, it rises to £2.3 trillion. In household terms it’s the equivalent of adding your mortgage, credit card bills, overdraft and other loans together.
About three per cent of the UK’s GDP goes to paying the interest on these debts. So what is the difference between debt and borrowing? Well, while the former is the total owed, the latter is the new money borrowed.
When the Government talks about borrowing it’s the equivalent of you having a splurge on your credit card or extending your mortgage to buy a new kitchen. In this year the Government expects to borrow another £120 billion, but it does predict the amount of new borrowing will slow down. And by 2016-17 it expects it to be £21 billion.
Elsewhere, the housing market continues to plod along with the average price across the UK falling by 0.9 per cent over the year to the end of March. But there were big regional differences and prices actually rose in seven out of 13 regions. The biggest rises were in London at 2.3 per cent followed by the outer South East at 1.8 per cent. The biggest falls were in Northern Ireland and Wales.
Finally, whisky lovers have been doing their utmost to support the Scottish economy. Whisky exports from Scotland rose to a new high of £4.23 billion last year, an annual increase of 23 per cent. The US and France are the biggest importers. Cheers!
Every month in My Virgin Money Magazine, Tony Hazell explains what’s currently happening in the economy and how it affects you. To make sure you don’t miss an update, sign up to receive our monthly emails telling you about new magazine content. For more articles on how to make the most of your money, see our Money homepage.
Tony Hazell is a freelance financial journalist. He edited the Daily Mail’s Money Mail section for over 12 years and now writes a weekly column for the newspaper solving readers’ financial dilemmas. He is married with two grown-up stepsons.
These are his personal views and not necessarily those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
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