Study: Worst consequences of recession 'still to come'

By UK CreditCards.com

Many Britons who have struggled to make ends meet over the last couple of years may be disheartened by a new report suggesting that the worst effects of the recession may yet lie ahead.

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According to the latest research from the Institute for Fiscal Studies (IFS), UK households were initially cushioned from the effects of the recession and it is only now that the full impact of cutbacks is filtering through to consumers.

Study reveals initial effects of recession
The IFS examined the effects of the recent recession on UK households as part of a cross-country study commissioned by the Fondazione Rodolfo Debenedetti. It found that during the country's worst recession for over 60 years, GDP fell by 6% and employment by 1.6 percentage points, both of which were somewhere in the middle of the international experience.

According to the IFS, household incomes in the UK actually grew slightly between 2007-08 and 2009-10. This was largely due to the "stabilising" effect of the state welfare system, which provided "unusually generous" financial support during the recession, the IFS said. Households in the bottom half of the income distribution benefited the most from this protective effect, which meant many families were shielded from the immediate impact of the downturn.

Tightest squeeze just starting
While it may seem that UK households escaped relatively lightly, the research suggests that many people are only now beginning to feel the squeeze. The government is taking tough action to repair the public purse and household incomes are consequently taking a knock. The IFS observed that earnings, state benefits and tax credits all fell in real terms in 2010 to 2011. Its estimates suggest that median net household income is likely to have fallen by 3.5% as a result, taking it back to the level seen in 2003 to 2004.

Thanks to this delay in the recession's impact on living standards and the government's unfolding austerity measures, the IFS says that the decline in average living standards is set to continue for up to 10 years. "The current economic downturn began more than three years ago and may seem like old news. But, as in other developed countries, the most severe consequences of the recession on UK living standards have only just begun to be felt, and will continue to be felt for years to come," said Research economist Robert Joyce, who contributed to the report, in a statement.

See related: Number of cash-strapped Brits at all-time high; Brits' savings efforts hampered by unsecured debt

Published: 15 September 2011