Trapped in a pay and price squeeze: Gloom for families as Bank warns of 'choppy recovery'

Gloom: With earnings outstripped by inflation, paying bills is getting harder

Millions of families face a painful squeeze in the cost of living, with figures showing a sharp fall in wage rises against a background of soaring prices.
Workers in the private sector saw their pay increase by an average of only 0.8 per cent in the past year, while inflation is four times higher at 3.2 per cent.
Details of the cap on wages were revealed as the Bank of England warned that inflation is expected to stay above the official target of 2 per cent through to the end of 2011. 
At the same time, sharp rises are in the pipeline on petrol and food following the doubling of the commodity price of wheat, barley and some other grain in recent weeks.
Bank Governor Mervyn King issued the alert as he said Britain is facing a ‘choppy recovery’ and cut his prediction of how quickly the economy will grow next year.
In yesterday’s quarterly inflation report, the Bank slashed its growth forecast for 2011 by just under a percentage point to 2.5 per cent.
But inflation would remain above the Government’s 2 per cent target for this year and next before falling back to 1.4 per cent in two years, it said.

Tumbling consumer confidence and the Government’s savage budget cuts will act as a brake on the economy as it struggles to emerge from recession, Mr King warned.
The crippled banking system and the mounting signs of stress in the global economy could derail Britain’s tentative recovery from the deepest downturn since the Second World War, he said.
Mr King warned: ‘Business and consumer sentiment have shown signs of softening, measures of financial fragility remain elevated and there is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area.’

some good news....jpg

The squeeze on living standards - the harshest since the 1970s - will be intensified by the decision to push up VAT to 20 per cent from January 4.

 

More...

• Comrade Crow's 12% pay increase: As millions suffer wage freezes, RMT's militant leader pockets £10,000
• ALEX BRUMMER: Watch out for icebergs, Cap'n Mervyn
• MAIL COMMENT: Banks must not stifle this fragile recovery
• Foreign workers surge by 114,000... but the number of Britons with jobs falls
• Hundreds of playground schemes axed as Government slashes £235m from education budget
• When will interest rates rise? (thisismoney.co.uk)

The salary figures were published by the Office of National Statistics (ONS) and confirm a pay apartheid between the private and public sectors.
Compared with the private sector’s 0.8 per cent average rise, increases in the public sector were more than triple that at 2.9 per cent.
Average public sector pay is also higher than in other walks of life, with a weekly figure of £470 against £451 in private firms - an annual gap of almost £1,000.
While the Government has announced a public-sector pay freeze for millions of workers designed to cut national debt, the unions have threatened a fight which could bring massive disruption in the autumn and beyond.

'Choppy' recovery: Bank of England governor Mervyn King yesterday

Retail industry experts have warned that the price of bread could rise by as much as 15p a loaf in the coming months.
Higher wheat prices will also push up the cost of pasta, pies and processed food while a pint in the pub could cost more than £4.
Prices will also be driven up across the high street by reports that petrol could reach a record high of more than £1.25 a litre in the new year.
Separately, power companies have been withdrawing cheap gas and electricity tariffs with some hinting at a need for rises.
Howard Archer, chief economist at IHS Global Insight, predicted that consumers will feel the pinch from wage restraint and high inflation.
‘With wage growth muted and a major fiscal squeeze increasingly kicking in, it is hard to see consumer spending being anything else than muted for an extended period,’ he said.
Details on pay were published alongside the latest unemployment figures which delivered the good news that the total was down 49,000 to 2.46million.
At the same time the number in employment rose by a 21-year high of 184,000 compared with a year ago.

However the vast majority of this increase - 115,000 - was in those taking low-paid part-time jobs as they fight to keep their heads above water.
The figure was also buoyed by a rise in the number of pensioners taking part-time work to supplement meagre incomes.

The jobless figures also confirmed that older workers are not benefiting from the apparent improvement. The number of over-50s in full-time work came down by 11,000.
Mervyn King’s comments reopened the debate over whether the scale and extent of the Government’s programme of cuts might plunge Britain back into recession.
Energy Secretary Chris Huhne insisted the recovery was ‘soundly based’, and dismissed fears of a ‘ double dip’ recession. He said the Government’s efforts to tackle the budget deficit were helping prevent a hike in interest rates which would damage the economy.
‘We mustn’t extend these maritime images too much. The Governor of the Bank of England was talking about “choppy recovery” and “ working against the head winds” and heaven knows what else.
‘The reality is that it is very unusual that there is a double dip recession in economic history and there are a lot of forces that are working to sustain the recovery. I just don’t think that there is going to be a threat to the recovery.’
But former chancellor Alistair Darling accused ministers of a ‘reckless style of austerity economics’ which threatened to derail the recovery. He added: ‘It will hit confidence and it will hit jobs.’

Give pay-offs back, Labour rivals told

Labour's leadership contenders have been challenged to accept their ‘ responsibility’ for the economic crisis - and hand back their £20,000 ministerial pay-offs.
Conservative Party chairman Sayeeda Warsi said ministers should atone for ‘running up colossal debts on the nation’s credit card’.
Labour ministers pocketed an astonishing £1million in severance pay after being booted out at the election - even though most have kept their jobs as MPs on £64,766 a year.
Former Cabinet ministers, including the Labour leadership candidates David Miliband, Ed Miliband, Ed Balls and Andy Burnham, were each entitled to handouts worth £19,938.

Baroness Warsi, here with Chris Huhne, has written to the leadership candidates to ask for the money back

The former Treasury chief secretary Liam Byrne, who left an infamous note for incoming ministers saying there was ‘no money left’ walked away with a similar sum.
The pay-offs were described as ‘rewards for failure’ and Baroness Warsi said ministers had a moral responsibility to hand the money back.
She said Labour was ‘in denial’ about the impact of its spending splurge. ‘At a time when people are being asked to tighten their belts, it is unacceptable that those responsible for this mess walk away with up to £20,000 each.’
Lady Warsi, a lawyer, wrote to the four former Cabinet ministers now challenging for the Labour leadership asking them to return the money.
Labour dismissed the call for the leadership contenders to give up their severance payments.
A spokesman said: ‘This is a pathetic attempt by the coalition to create a smokescreen around today’s serious economic issues.’

Watch out for icebergs, Cap'n Mervyn

COMMENTARY By Alex Brummer, CITY EDITOR

Now that the nation has been scared to death by the Government’s austerity budget, the Bank of England has decided to play good fairy.
Growth might be lower than it would have been had the Tories not promised to deliver such deep cuts. But the Governor Mervyn King, arguably Britain’s most important economic policymaker, thinks that with a little bit of help from the Old Lady of Threadneedle Street, the dreaded ‘double dip’ can be avoided and Britain can return to above average growth by 2011.

By his own admission yesterday, any recovery will be ‘choppy’. After the steepest loss of output in the UK since the 1930s, the return to prosperity was never going to be smooth.
However what is clearly emerging in Britain is a tale of two economies. On the one side, the Tory-led coalition has outlined the most severe cuts in public spending in modern times - in an effort to prevent Britain becoming the new Greece, as Chancellor George Osborne puts it. This prospect already has some British consumers and businesses running for cover.
In stark contrast, manufacturing, for years the most unfashionable part of the UK economy, is having something of a renaissance. Firms are benefiting strongly from the falling value of the pound, which makes our exports much cheaper overseas.
Meanwhile, as Mr Osborne fits in an Italian break, much of Middle Britain has taken to heart his threats of tough times ahead. The services sector index, which was robust earlier this year, has flattened. The Royal Institution of Chartered Surveyors is warning of falling house prices (despite the sale of one newbuild property in central London for an astonishing £140million.) The British Retail Consortium is forecasting dull sales for everything except food. And the two biggest travel firms TUI (which owns Thomson) and Thomas Cook report hundreds of thousands of traditional summer holidays unsold.

Historically, all of the strongest upswings in the British economy in the post-war era have followed falls in the value of the pound.

Nevertheless, if Britain is aiming for a different kind of recovery - less dependent on the moneybags in the City filling their pockets - this might be no bad thing. Strong retail savings by households are necessary if companies are to be able to raise cash on the stock market to invest. Similarly, the squeeze on real incomes - as earnings are held low and inflation is allowed to drift above the Bank of England’s 2 per cent target, should enable UK firms to remain reasonably competitive in the global marketplace.
This will be key if the UK is to have an export and manufacturing-led recovery. Historically, all of the strongest upswings in the British economy in the post-war era have followed falls in the value of the pound. On the Bank of England’s reckoning the pound has lost 25 per cent of its value against the currencies of the countries with which we do most trade. The most recent fall occurred during a period of such unprecedented turbulence in the banking sector, financial markets and the economy that it went almost unnoticed as an event in its own right.
However, this is a larger loss of value for the pound than under the Labour governments of the 1970s and when Britain was ejected from the exchange rate mechanism in 1992 under John Major. After all of these devaluations the British economy enjoyed an export led bounce-back.
The overarching picture looks a great deal more complicated this time, as Mr King acknowledged at his quarterly Inflation Report briefing. The biggest problem is the impact of the budget cuts and its effect on consumer and business behaviour. On the other hand, it almost certainly means that the UK will be able to retain its topnotch credit rating, plus longer-term interest rates (those paid by companies investing for the future) will be lower than would otherwise be the case.
Moreover, calculations by the Bank suggest that despite all the hot words from the Chancellor, the projected decline in public-sector borrowing will be broadly similar to that in the 1990s when the UK economy still managed to grow.

The overarching picture looks a great deal more complicated this time... The biggest problem is the impact of the budget cuts and its effect on consumer and business behaviour.

Another worry this time around is poor credit conditions. Despite all the aid (more than £1trillion) which the authorities have provided to the banking sector, in one way or another, the money markets are still not operating as they were before the credit crunch of three years ago. Put starkly, the banks are not lending enough.
Big businesses might have found ways of raising new loans, yet smaller and medium-sized businesses are still struggling not only to find the new money, but to meet punitive demands for upfront fees and extra security as the banks behave appallingly.
The final and perhaps most daunting factor facing Britain is the state of the global economy. Much of our surge in exports so far has been to the North American market, so it is critical to the UK that the Federal Reserve, the U.S. central bank, continues to pump funds into the U.S. economy. In Europe, the only hope comes from Germany, which is still expanding despite the unresolved problems of Greece and the Club Med nations. Finally, there are also disturbing indications that China - a large potential market - is coming off the boil.
The lesson from economic crises of the past is that recovery is often uneven and rarely a straight line with serious setbacks along the road. The uncertainty is never a pleasant experience for consumers or business and can be deeply unsettling. The only small comfort is that the Bank of England believes that it can ride out current inflation worries, arising from VAT and prices of commodities such as wheat, and hold interest rates at record low levels of 0.5 per cent. That might be bad luck for savers but should assist in stimulating demand.
A great deal rides on the Bank’s ability to negotiate these turbulent waters.