UK looks set to avoid double-dip recession … with debt-fuelled recovery

The better off are dipping into savings while poorer families are turning to pay-day loan companies
pay packet
Pay is still lagging behind price inflation, ONS data shows. Photograph: Alamy

Wage inflation (excluding bonuses) is running at an annual rate of 1.7% – price inflation is almost double at 3.6%.

What kind of consumption-driven recovery are economists cheering when wages are growing more slowly than the cost of a weekly shop? The answer is a debt-fuelled recovery.

Like a Tour de France cyclist who only had a croissant for breakfast, the UK economy must dip into personal reserves to keep going.

So far, most of the information we have is sketchy, yet it is becoming clear that better off families are paying down their mortgages more slowly than expected and dipping into savings to maintain their standard of living. Poorer families are turning to pay-day loan companies.

Their combined efforts keep retailers' tills ringing and appear to have prevented a double-dip recession (though we must wait until next month for the figures on that). But the notion of a re-balancing between debt and savings appears to have gone out the window.

Wednesday's unemployment figures from the Office for National Statistics are the source of the figures on wages.

The ONS found wages were even worse if bonuses are included, with a paltry rise of 1.4%. (As the CEBR thinktank points out, the impact of bonuses is particularly pronounced in the finance and business services sectors where bonus payments collapsed year on year by 6.2%, illustrating the tough trading conditions faced by businesses in this sector over the past year.)

In the three months to January the 1.4% figure represented a 0.5 percentage point cut on the 1.9% registered in December.

Of course, inflation has come down and could fall further, but wages are going nowhere and unlikely to rise above inflation for the rest of the year.

The answer is not to encourage shopping on tick, or accept weak consumption four years into a slump as a fact of life. Instead the government should step in and invest in areas that raise productivity, boost confidence and get the private sector engine motoring.

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