Household food budgets have borne the brunt of an “unprecedented” fall in consumer spending during the recent economic downturn, new research shows.
By James Kirkup, Political Correspondent
12:48AM BST 19 Oct 2011
The Institute for Fiscal Studies said that, unlike in previous recessions, families have reacted to a squeeze on living standards by cutting back the amount they spend on food and drink.
Spending on holidays and restaurant meals has also been sacrificed, the economists said. By contrast, spending on “durable” items like cars and electrical goods saw smaller falls.
The research also highlighted significant variations in the way households have adjusted their spending, with younger people cutting back much more than their elders.
People under 35 cut back their spending by an average of seven percentage points. For those between 35 and 64, the drop was five points. Yet for those aged 65 and over, there was “no statistically significant fall”.
Consumer spending accounts for about two thirds of economic activity in Britain. The study, which is published today, found that, because of the last recession, household expenditure saw the deepest and longest drop in recent history.
Spending will also take several more years to recover to its pre-recession levels, meaning Britain’s economic recovery will be slow and painful, the paper said.
Average household spending fell by almost 5 per cent in real terms between the first quarter of 2008 and the second quarter of 2009, the IFS calculated.
Spending on food was 6.6 per cent down. The paper suggested that the fall in spending did not necessarily mean households were eating less. Rather, the figures could reflect a greater tendency to purchase cheaper types of food.
By contrast, spending on motoring was down 3.2 per cent and durable leisure goods dropped 1.6 per cent.
That suggests that two of the Labour government’s economic policies – a temporary reduction in the rate of VAT and a car scrappage scheme – had “some success in encouraging households to bring forward some durable purchases”.
The IFS also suggested that spending would remain depressed for some time. Even on the “optimistic” official forecasts, household spending would not return to its pre-crisis levels until 2013.
A five-year period of reduced consumer spending would be almost twice as long as that endured after previous recessions. The IFS team also suggested that the period of pain could be even longer if the official forecasts prove to be too high.
Cormac O’Dea, a senior economist at the IFS, said households had suffered more during the recent recession. He said: “Continued economic weakness has gone hand in hand with continued low levels of household spending and the drop in spending since 2008 has been unprecedented in recent history both in its scale and its persistence.”
Official figures this month showed that household spending on essentials like food and fuel had fallen to the lowest level in almost a decade as families tightened their belts amid growing fears for the economy. The data showed household spending had shrunk for four consecutive quarters, meaning that the consumer economy had fallen into back into recession.