Real wages (average earnings growth minus retail price inflation) have now fallen for 17 months in the UK.
The OBR expects this to continue throughout 2011 and 2012 and into 2013. And yet they believe consumption will grow in excess of real household disposable income.
As I’ve explained before, this forecast is driven by a falling household savings ratio. In other words the government expect households to borrow to maintain their consumption.
And as I’ve pointed out, despite all the talk of exports and investment – the OBR still expects the consumer to play a crucial role as a driver of economic growth.
The problem is there is very little evidence that cautious households are prepared to borrow – something made very clear by the chart below taken from Bank of England data.
If household’s debt appetite remains subdued and real wages continue to fall – how exactly is consumption expected to grow?
Against this background it is unsurprising that Sainsbury’s CEO Justin King has today described the retail environment as ‘tough’ and noted that ‘higher fuel costs and the government’s austerity measures were eating into household budgets, forcing many customers to trade down to Sainsbury’s cheaper, own-label “Basics” range’. ‘