Economic recovery strengthens but households continue to feel the squeeze, says review

The UK’s economic recovery appears to have strengthened during the third quarter of 2013, based on a wide range of indicators, according to a review by the Office for National Statistics (ONS).

Estimates of output in the services and construction industries both show an acceleration between the second and third quarters, while retail sales volumes grew at the fastest quarterly rate since the start of 2008. The labour market continued its recent improvement, with employment and hours rising and unemployment falling. Following a period of relatively flat output growth during 2011 and 2012, the UK economy has now grown for three consecutive quarters, although output remains 2.6% below its pre-downturn peak.

However, the economic position of households remains under pressure as prices continue to rise more quickly than earnings. The ONS review highlights the recent weakness in household income growth compared with the growth of total output, although the two variables have behaved in a broadly similar manner to that in previous economic downturns. Real Household Disposable Income (RHDI) has changed little since the second quarter of 2009, despite cumulative real GDP growth of 4.2% over this period.

The ONS review also examines the squeeze placed on household budgets by recent increases in the prices of essential items. In particular, the proportion of households’ disposable income which is accounted for by expenditure on gas and electricity has risen from 1.8% to 3.1% between 2003 and 2013, while the volume of these household purchases has changed little.

Key points:

• The UK’s economic recovery appears to have strengthened during Q3 2013. The preliminary estimate of Gross Domestic Product (GDP) indicated that output grew by 0.8% during the three months to September.
• The extent of the contraction in construction output during the downturn was cushioned by a large increase in public sector and infrastructure activity. This effect is reduced in more recent periods, when construction output has instead been supported by a pick-up in private sector new housing activity.
• The economic position of households remains under pressure. Following relatively strong growth in Real Households’ Disposable Income (RHDI) during the downturn, RHDI has been broadly flat since Q3 2009, despite cumulative real GDP growth of 4.2% over this period. This analysis suggests that this relationship between RHDI and GDP growth during a period of economic recovery is broadly similar to previous experience.
• The proportion of household income accounted for by expenditure on ‘essential’ household goods has risen from 28.3% in 2003 to 36.0% in 2013. The proportion accounted for by gas and electricity has risen from 1.8% in 2003 to 3.1% in 2013, despite very little overall change in the volume of household energy consumption.