UK living standards set to stagnate for rest of 2020s, think tank says

A Resolution Foundation report projects UK living standards will see minimal real growth through 2029/30, with median household incomes rising just 1%. The analysis highlights a widening disparity, forecasting a 1% real income decline for lower-income families and mortgage holders due to welfare cuts and higher interest rates, while outright homeowners and pensioners are set to gain 3% and 5% respectively. This challenging outlook for a significant segment of households, influenced by current economic and welfare policies, could be impacted by stronger economic growth or potential government policy shifts.

Analysis

A recent report from the Resolution Foundation projects a period of significant economic strain for UK households, with real median incomes forecast to grow by a mere 1% by the 2029/30 fiscal year. This headline figure conceals a stark divergence in outcomes across different demographics. Lower-income families and households with mortgages are expected to experience a 1% real-term decline in income, pressured by a combination of welfare policy constraints and the lagged impact of higher interest rates. In contrast, asset-owning demographics are projected to fare better, with outright homeowners seeing a 3% income rise and pensioners a 5% increase. This bifurcated outlook, which sees families with children facing zero income growth, highlights a structural challenge for the UK's consumer economy. While the report notes that stronger-than-anticipated economic growth could improve this forecast, the current trajectory is heavily influenced by fiscal policy choices, such as the two-child benefit limit and rules on long-term sickness benefits, which remain a point of political debate.

Key Decisions for Investors

• Given the projected income divergence, investors should consider a barbell strategy, favoring sectors catering to wealthier, older demographics while remaining cautious on businesses reliant on discretionary spending from younger, indebted households.
• The forecast for near-stagnant real income growth poses a significant headwind for the UK domestic economy; therefore, re-evaluating exposure to UK-focused consumer discretionary stocks may be prudent.
• Monitor upcoming UK fiscal policy announcements closely, as any changes to welfare or housing support could materially impact consumer spending power and shift the outlook for specific market segments.