‘Squeezed’ middle class households to lose £4,000 this year

‘Squeezed’ middle class households to lose £4,000 this year
‘Squeezed’ middle class households to lose £4,000 this year

Britain will dodge a recession this year despite a painful slowdown that will hit the middle classes, a respected think tank has said.

The National Institute of Economic and Social Research (NIESR) said Britain will skirt a “technical recession” despite growth slowing to a crawl, as falling gas prices help limit the damage to the economy.

NIESR is the first major forecaster to predict that Britain will avoid a recession, amid growing optimism across Europe that gloomy forecasts for 2023 will not come to pass.

However, households in Britain’s “squeezed middle” will still experience a significant hit to their living standards this year, NIESR warned, as inflation and higher interest rates eat into incomes. The middle classes will be nearly £4,000 worse off this year, the think tank said.

“The UK is likely to avoid a ‘technical recession’ in 2023. Though, with GDP growth set to remain close to zero in 2023 and real personal disposable income having contracted for four consecutive quarters, it will certainly feel like a recession for many,” NIESR said.

Inflation is expected to continue to eat into people’s incomes this year, with 80pc of retailers set to increase their prices in 2023, according to research Retail Economics.

Rising prices will add £18bn to the nation’s shopping bill this year despite the fact shoppers are expected to buy fewer items.

Torsten Bell, head of economic think tank the Resolution Foundation, told MPs on Tuesday that stagnating living standards mean the UK is failing to keep up with neighbouring countries.

“Britain is now well into a phase of relative decline... middle Britain is now significantly poorer than middle France and middle Germany,” he told members of the business select committee.

The UK’s high inequality and smaller economy relative to peers such as Germany are dragging down living standards for middle class and working people, he said.

NIESR said many middle earner families will struggle this year regardless of whether the UK manages to dodge a technical recession.

All households have become poorer because of rising inflation, NIESR said, but the poorest have experienced less of a fall in their real incomes as a result of targeted support through Universal Credit.

Stephen Millard, deputy director of NIESR, said the Government had shielded the poorest households from higher energy costs with the Autumn Statement measures “but that support ends once you're earning and into more of the middle-income area”.

“The other big shocks that households have seen as of late are the rises in interest rates and they obviously tend to hit people with mortgages who again are going to be in the middle of the income distribution,” he said.

NIESR expects the UK economy to grow 0.2pc this year before expanding by 1pc in 2024. However, that is more upbeat than most forecasts who expect a contraction in 2023.

The Bank of England has forecast that the economy will shrink by 1pc in 2023 and the International Monetary Fund has said Britain will be the only major economy to contract this year.

However, despite short-term optimism, NIESR said action was needed to stop long-term stagnation.

Professor Adrian Pabst, deputy director for public policy, said: “To level up the country and reduce household-level inequalities, fiscal policy needs to be targeted, Levelling Up funding needs to be unified and applications simplified. And government should put in place a long-term public investment strategy that helps to unlock business investment.”

The Resolution Foundation’s Mr Bell told MPs that Britain needed to "stop living in a dreamland of reindustrialisation" and focus on the services industries, such as banking, as a way to kick start growth.

Despite stagnating growth, the jobs market remains tight. Starting salaries “continued to climb sharply in January”, according to KPMG and REC, as companies struggle to find qualified staff. The number of permanent hires dropped over the past four months as companies struggled to find workers, driving demand for temporary staff higher.