Real household income across industrialised nations, including Ireland, fell in the first quarter of 2022 as soaring prices reduced the buying power of consumers, according to the Organisation for Economic Co-operation and Development (OECD). Economists fear a sharp decline in consumption by cash-strapped households will trigger a recession in the euro zone.
The OECD said real household income per capita declined by 1.1 per cent during the first three months of the year but remained nearly 3 per cent higher than before the pandemic. “The decline in real household income per capita was partly due to increases in consumer prices, which undermined household income in real terms,” it said.
Most agencies are expecting an even bigger decline in real incomes over the coming months as businesses pass on higher input costs to consumers. With inflation in the Republic expected to average approximately 7 per cent this year and earnings expected to grow by just 3.5 per cent, real incomes for Irish households will contract by up to 4 per cent, according to the Economic and Social Research Institute, representing the biggest drop in living standards since the 2008-2009 period when the economy imploded in the face of a global credit crunch.
Among the G7 economies, the impact of inflation on households in the first quarter of 2022 was particularly clear in France, where real household income per capita fell by 1.9 per cent and Germany, where it fell by 1.7 per cent, the OECD said. Elsewhere in Europe, high household inflation also contributed to large falls in real household income per capita in Austria (-5.5 per cent) and Spain (-4.1 per cent).
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The latest OECD figures come as the International Monetary Fund (IMF) urged European governments to pass on rising energy costs to consumers to encourage “energy saving” and a shift towards greener power while protecting poorer households.
European governments which have tried to shield households from soaring costs with price controls, tax cuts and subsidies “should allow the full increase in fuels costs to pass to end users to encourage energy saving and switching out of fossil fuels”, said the assistant director in the IMF’s European department.
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Writing in an IMF blog post on Wednesday, Oya Celasun added that at the same time governments should put relief measures in place to support low-income households — which are least able to cope with spiking energy prices — as “a priority”.
Energy consumer prices are rising at an annual rate of nearly 40 per cent in the euro zone and 57 per cent in the UK, reflecting the surge in wholesale gas and oil prices after Russia’s invasion of Ukraine. That is drastically eating into households’ disposable income.
Poorer households, which spend a larger share of their money on electricity and gas, are particularly hard-hit.
As a result, the IMF urged a government policy shift from broad-based support measures to targeted relief.
The existing measures include energy price caps in France, Spain and Portugal, electricity tax cuts in Germany and the Netherlands, energy subsidies in Italy and Greece and energy allowances in Germany and the UK.
However, “with fossil fuels likely to remain expensive for some time, governments should let retail prices rise to promote energy conservation while protecting poorer households”, said Ms Celasun. — Additional reporting by The Financial Times
