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Cost-of-living crisis to last until end of 2024

Author: ICAEW Insights

Published: 19 Jan 2023

Times are expected to get worse before they get better, with far-reaching impacts on financial resilience and health, Resolution Foundation report warns.

With wholesale gas prices falling thanks to a warmer than expected winter, households should have been able to breathe a sigh of relief. But new research shows that real wages aren’t expected to return to early 2022 levels until the end of 2027.

Worse still is the finding that typical incomes are set to remain below their real-terms pre-pandemic level for another five to six years, according to The Resolution Foundation’s report The Living Standards Outlook 2023.

The cost-of-living crisis is affecting almost everyone, but some are much more deeply squeezed than others, with poorer and prime age (25-55) adults hit especially hard. Just over three-quarters of UK adults said in November that they were trying to cut back on spending. “This pattern of some belt-tightening hardly varies by income,” the report found. 

Those aged 65 and above appear to be “relatively insulated”, especially if they have savings, which will be boosted by rising interest rates. 

Even with some respite from escalating energy prices, the cost of energy and other essentials will have far-reaching impacts on financial resilience and health, the report found. Retail energy prices are still expected to rise rather than fall, due to the scaling-back of government support. 

Some of the impacts may be short-lived, while signs suggest that the cost-of-living crisis will leave “a long-term mark on people’s finances and health”. The report warned that “the rest of this financial year will still be grim”. 

Simon Gray, Head of Business, ICAEW, said the report makes concerning but unsurprising reading. “ICAEW members in consumer-facing businesses, including retail and hospitality, have flagged more cautious and careful spending as individuals and families face critical decisions on how best to stretch falling real incomes. ICAEW’s Business Confidence Monitor and recent GDP figures further point to a downturn in consumer confidence manifested in reduced spending.”

Levels of debt are rising as people struggle to pay for the basics such as food and energy. More worrying is the proportion of people who are falling behind on paying bills. In November, 11% of respondents said that their debts had increased moderately or substantially in the past three months, rising to 20% among workers in low-income families. A total of 10% of people – and a quarter of workers in poorer households – have failed to pay at least one priority bill over the past three months.

What could this mean for the accountancy sector? It’s likely that both personal and corporate insolvency services will experience higher demand. News that the UK narrowly avoided falling into recession in the last quarter of 2022 offered only slight relief last week.

Economists still expect the UK to face a recession, but it may not be as deep or as long as previously anticipated. However, it won’t feel like that for most households as rising interest rates and higher taxes take effect over the coming months.

The Office for Budget Responsibility (OBR) is forecasting 1.1 million more people will be unemployed by the first quarter in 2024 than in early 2023. 

Moreover, with the central bank’s interest rates at 3.5% and set to rise further, around 1.8 million households with fixed-rate mortgages set to be renewed in 2023/24 will face a further squeeze. The Resolution Foundation’s report said the average household renewing a mortgage in 2023 will face a £3,000 annual increase in mortgage costs. 

Accountants can expect to be busier than normal during these tough times. As trusted advisers to businesses of all sizes, they can expect clients to lean heavily on them for advice. Clients in energy-intensive sectors such as hospitality and manufacturing are likely to be most affected by increasing costs, especially escalating energy costs this winter.

Accountants are well-equipped to advise on government energy support and other available tax reliefs or funding opportunities. Advice on curbing overheads will be increasingly sought after by clients as the winter takes hold. Cash flow forecasting and future planning will be vital skills that accountants can offer clients as they struggle to survive over the next two years of economic hardship.

Gray said: “ICAEW Chartered Accountants play a crucial role in helping businesses navigate an environment of squeezed margins, where higher costs and reduced revenues make cash flow management a key priority.” 

Member firms have also reported an uptick in insolvency enquiries and hinted at the likelihood of more to follow, Gray added. “It’s no secret that 2023 is set to be a challenging year, where taking proactive control of finances and building resilience at every level in a business have never been more important.”

Cost of doing business

Insights, analysis and resources for organisations facing rising costs of doing business amid a multitude of challenges, including energy prices, inflation, supply chain disruption and staff recruitment and retention.

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