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UK households will go to the polls in July against a backdrop of stubbornly high mortgage rates, near-record rent inflation, a slowing jobs market and per-capita GDP that remains below pre-Covid levels.
At 2.3 per cent, headline inflation has fallen to its lowest level in almost three years and close to the Bank of England’s target, after exceeding 11 per cent in 2022. But markets now put low odds on the BoE cutting rates from 5.25 per cent at its June meeting because of strong underlying price pressures.
Simon French, head of research at investment bank Panmure Gordon, said the legacy of rising prices — which have surged by 20 per cent since this time in 2021 — would continue to weigh heavily on UK households. This is despite economic output starting to pick up as wages grow in real terms.
For the Conservative government, he said, “the last thing to shift is the credit the public give you”. The Tories continue to lag Labour by a steady 20 points in the polls.
On the first full day of campaigning, Prime Minister Rishi Sunak attempted to push the message of an economic turnaround, saying the UK was enjoying “gangbusters” growth.
Britain’s economy grew 0.6 per cent in the first three months of this year, outpacing the US’s 0.4 per cent and ending a technical recession. But the US has grown far more since the eve of the pandemic, expanding by 8.9 per cent compared with just 1.7 per cent in the UK.
The rise in mortgage rates has been the biggest blow to the Conservatives’ claims of economic competence, with many voters blaming Liz Truss’s ill-fated “mini” Budget in 2022.
About 5mn households were hit with rising mortgage costs between 2021 and the end of last year, and the BoE said in December that a further 5mn would need to refinance at a higher rate by 2026. Monthly repayments would typically increase by roughly £240, or 40 per cent, it said. While mortgage rates have eased from their peaks in the summer of 2023, they have ticked up since February.
Meanwhile, annual growth in rents rose at a record pace of 9.2 per cent in April, and has eased only marginally since. As a result, about two in five adults are struggling to pay for housing, according to the ONS.
The sour mood is clearly evident in surveys and opinion polls, but the main economic indicators are pointing to an upturn, with GDP growing by 0.6 per cent in the first quarter.
The quickest pace of growth in two years prompted the IMF to upgrade its forecast this year to 0.7 per cent growth, although it warned that the UK faces a £30bn funding gap.
Nevertheless, UK consumer confidence stood at minus 19 in April, well below the average of minus 5.3 per cent between 2014 and 2019, according to the GfK consumer index.
According to YouGov polling from May 18-20, a quarter of Britons approve of how the economy is being handled, the highest figure since March 2022. But that remains dwarfed by the 69 per cent who disapprove.
“They are playing to a very, very hostile crowd at the moment and I don’t think there is very much they could do that would change that,” said Jack Bailey, a political scientist at the University of Manchester. “For this strategy to work there would have to be a period of time for things to really stabilise in the public psyche.”
One silver lining is the jobs market, where unemployment remains low and pay growth has proved stronger than expected — average earnings are now roughly back at their early 2021 level in real terms.
The trouble is that this recovery follows a long period in which wages have stagnated, low income households have seen the value of benefits eroded by inflation, and frozen tax thresholds have penalised higher earners.
Real disposable income per person fell 1.8 per cent in the four years to the end of 2023, official data shows. Since the Conservatives came to power in 2010 real wages have risen by just 3.6 per cent.
Spending patterns match the moribund picture. The volume of goods and services consumed by UK households has stagnated over the past four years, compared with a 10 per cent growth in the US — undermining Sunak’s boast that UK economic growth was now starting to outpace that of the US.
Against this backdrop, the prime minister’s claim that inflation is “back to normal” may cut little ice with people still unable to afford essentials.
“The economy is returning to a more normal state. But that ‘normal’ currently bakes in many more people facing hunger and severe hardship,” said Helen Barnard, director of policy at the Trussell Trust charity, which has seen rising levels of destitution and demand for its food parcels.
She added: “This isn’t a short-term problem that will fade away as inflation falls and growth recovers. It’s a long-term problem and every party needs a proper plan to fix it.”
