Key Takeaways
- After a historic two-year decline, UK real household disposable income (RHDI) is beginning a slow recovery, primarily due to falling inflation rather than robust wage growth. However, living standards, measured by RHDI per person, remain below pre-pandemic levels and are not forecast to surpass them until 2025 or later.
- Contrary to expectations of a spending rebound, households have increased their savings, with the saving ratio rising. This suggests a climate of caution and debt repayment is prevailing over a desire for immediate consumption, posing a headwind for consumer-facing sectors.
- The economic experience is diverging significantly. Higher interest rates are punishing households with mortgages and other debt, while simultaneously boosting the incomes of wealthier, cash-rich individuals, creating a complex and fractured consumer landscape.
- The ongoing cost of living pressures and the fragile recovery form the central theme of the UK political environment, with the upcoming general election adding a layer of uncertainty that may further delay significant household and corporate spending decisions.
After enduring the most significant two-year decline in living standards since records began in the 1950s, UK households are tentatively entering a period of recovery. The intense squeeze on real incomes that defined 2022 and 2023 is technically abating, yet a closer examination of the data reveals a landscape of profound caution, not a return to unrestrained spending. The underlying mechanics of this recovery, driven more by receding inflation than by surging economic vitality, point towards a protracted period of adjustment with clear implications for specific market sectors and monetary policy.
Anatomy of a Historic Squeeze and Fragile Rebound
The core of the issue has been the erosion of purchasing power. Between 2021 and 2023, high inflation comprehensively outstripped wage and income growth, leading to a severe contraction in real household disposable income (RHDI). According to the Office for Budget Responsibility (OBR), RHDI per person fell for seven consecutive quarters into 2023, a downturn unprecedented in modern records. While the headline figures are now turning positive, the cumulative damage is substantial. The OBR’s March 2024 forecast projects that RHDI per person will not return to its pre-pandemic peak until the 2025-26 financial year.1
The recovery itself is largely a mathematical function of disinflation. As the rate of price increases slows to a more manageable level, even modest nominal income growth translates into a real-terms gain. However, this is quite different from a recovery driven by a booming economy and widespread prosperity.
| Metric | 2022-23 (Actual) | 2023-24 (Estimate) | 2024-25 (Forecast) |
|---|---|---|---|
| Real Household Disposable Income (RHDI) per Person Growth | -2.2% | -0.8% | 1.3% |
| Household Saving Ratio | 8.4% | 10.2% | 9.7% |
| Real Household Consumption Growth | 0.7% | 0.4% | 0.9% |
Source: Office for Budget Responsibility, Economic and fiscal outlook, March 2024.
The Cautious Consumer Emerges
One of the most telling indicators of the public mood is not what households earn, but what they do with it. The household saving ratio provides a fascinating insight. Rather than immediately spending their recovering income, households have opted to save more. The Office for National Statistics (ONS) reported that the saving ratio rose to 10.2% in the fourth quarter of 2023.2 This behaviour points towards a collective effort to rebuild financial buffers eroded during the inflationary peak, pay down expensive debt, or simply save out of precaution given the economic uncertainty. It suggests consumer confidence, while improving from its historic lows, remains brittle. This prudence acts as a natural brake on economic growth, restraining the potential for a V-shaped recovery in consumer-facing industries.
Divergence, Not Uniform Distress
The national averages mask a deeply fractured reality. The impact of higher interest rates, the primary tool used to combat inflation, has been anything but uniform. For the roughly one-third of households who own their home outright and possess cash savings, higher rates have actually boosted incomes. Conversely, for households with mortgages, particularly those needing to refinance from low fixed rates, and those with significant personal debt, higher borrowing costs have amplified the income squeeze.3
This bifurcation has direct consequences for investment strategy. Sectors can no longer be viewed through a single consumer lens.
- Vulnerable Sectors: Businesses reliant on discretionary, debt-financed spending appear most exposed. This includes automotive sales, home improvement retailers, and sellers of large durable goods. Mid-market hospitality and retail, lacking the defensive appeal of discounters or the resilience of the luxury segment, may find themselves in a perilous position.
- Resilient Sectors: Discount retailers continue to hold a structural advantage. Furthermore, companies catering to the “at home” economy and those in the premium and luxury space may prove surprisingly resilient, supported by the less-indebted, wealthier demographic whose balance sheets have been bolstered by higher interest returns.
The Political and Monetary Overhang
This economic backdrop serves as the stage for both the Bank of England’s policy decisions and the UK’s political discourse. For the Bank, the weakness in real consumption, despite a technical income recovery, complicates the path for interest rate cuts. A dovish pivot is warranted to support growth, but the persistence of services inflation may force a more cautious approach. Markets will likely remain volatile as they attempt to price in this complex trade-off.
Simultaneously, the “big shrink” in living standards has become the central issue in the UK’s political arena.4 With a general election looming, the resulting uncertainty is likely to weigh on sentiment, potentially causing both households and businesses to postpone major financial commitments until the political landscape becomes clearer.
The story of UK household income is no longer one of simple, acute crisis. It has morphed into a complex narrative of a slow, uneven recovery clouded by caution, divergence, and political risk. The speculative hypothesis is this: the current divergence between indebted younger households and asset-rich older ones will not be a temporary feature of this economic cycle. Instead, it will catalyse a permanent hollowing-out of the UK’s middle market. We may see a structural bifurcation where discount brands and premium/luxury services thrive, while the vast middle ground, which once formed the bedrock of the consumer economy, faces a generation of stagnation.
References
1. Office for Budget Responsibility. (2024, March). Economic and fiscal outlook – March 2024. Retrieved from https://obr.uk/efo/economic-and-fiscal-outlook-march-2024/
2. Office for National Statistics. (2024, March 28). GDP quarterly national accounts, UK: October to December 2023. Retrieved from https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/quarterlynationalaccounts/octobertodecember2023
3. Bell, T., & Cominetti, N. (2024, March). Totally Stagnation: The Living Standards Outlook 2024. Resolution Foundation. Retrieved from https://www.resolutionfoundation.org/publications/the-living-standards-outlook-2024/
4. Giles, C. (2024, May 22). UK election enters uncharted territory of ‘the big shrink’. Financial Times. Retrieved from https://www.ft.com/content/8b5d9b7b-9aa5-44c7-97d6-07bd560b9fa6
5. Giles, C. (2023, June 27). UK households suffer biggest fall in disposable income in 70 years. Financial Times. Retrieved from https://www.ft.com/content/08a1004c-4378-4eb8-9b2f-87ca63b3873f
6. @unusual_whales. (2023, June 27). [UK household disposable income fell at its fastest rate in two years, per FT]. Retrieved from https://x.com/unusual_whales/status/1673647612388589568
