Living standards in UK slip despite leading G7 growth, handing Burnham economic challenge

UK living standards declined in the first quarter of this year despite the economy growing at its fastest pace since early 2025, underscoring the challenge awaiting the next prime minister as households grapple with rising taxes and stubborn inflation.

New data from the Office for National Statistics shows that real household disposable income per head – the amount of money people have left after taxes and adjusted for price rises – fell by 0.8% in the three months to March, wiping out a 1.2% gain recorded in the final quarter of last year. The figure marks only a partial recovery from the larger drop earlier in the cost‑of‑living crisis, and the ONS confirmed the squeeze came despite higher wages and rising income from property.

The fall in disposable income was driven by a sharp increase in taxes on wealth and income, which rose by £6.9bn, and a £5.1bn drop in net social contributions. The ONS said the reduction in the tax‑free allowance for capital gains had contributed to higher capital gains tax payments. At the same time, inflation eroded the real value of earnings, with consumer prices remaining elevated.

Households responded by saving less. The saving ratio – the proportion of disposable income set aside rather than spent – fell by 0.7 percentage points to 8.9% in the first quarter, driven by a decline in non‑pension saving. While still above pre‑pandemic levels, the drop suggests households have less room to absorb future shocks. Pantheon Macroeconomics chief UK economist Rob Wood said sticky inflation would mean real household disposable income grows only slowly for the rest of 2026, forcing families to dip into savings to maintain spending. “The household saving rate still remains well above its 2015‑to‑2019 average of 6.5%,” he noted, adding that consumers could keep smoothing their expenditure through the recent energy price shock.

The ONS’s director of economic statistics, Liz McKeown, said the data showed no revision to first‑quarter growth but that annual growth for 2025 had been revised down a little. “The household saving ratio continued to ease at the start of 2026 but remains above its pre‑pandemic levels,” she added.

Economic growth outstrips G7 peers

Despite the living‑standards squeeze, the ONS confirmed the UK economy grew by 0.6% in the first quarter – the highest quarterly expansion among G7 countries. The US and Japan both recorded 0.5%, Italy and Germany 0.3%, while Canada stagnated and France contracted by 0.1%, pushing it to the brink of a technical recession. The UK’s growth was driven by the services sector, which expanded by 0.8%, with particular strength in computer programming, wholesale trade and advertising. Both production and construction grew by 0.2%, signalling a modest broadening in economic momentum after a period of heavy reliance on consumer and government spending.

However, the positive headline figures masked underlying fragility. Annual GDP growth for 2025 was revised down to 1.3% from 1.4%, and the ONS noted that April data had already shown a 0.1% monthly contraction. Quilter Cheviot investment manager Jonathan Raymond warned that “the first quarter may prove to be a peak for growth rather than the start of a sustained recovery”.

Investec economist Philip Shaw described the 0.6% quarterly rise as “a decent start to 2026” but cautioned that the recent surge in energy prices would soon take effect. “We envisage growth coming close to a halt in Q3, although the level of the saving ratio will give households in aggregate a cushion,” he said. On a more optimistic note, Investec lowered its forecast for UK inflation this year, predicting a peak of 3.1% rather than 4.0%, thanks to a sharp decline in energy prices.

The UK’s trade deficit also widened slightly, with the ONS reporting that the deficit excluding non‑monetary gold and precious metals rose to 1.0% of nominal GDP in the first quarter, up from a previous estimate of 0.9%. Business investment rose by 0.9% in the quarter, while household spending increased by 0.6%.

Barclays buys Canary Wharf headquarters

In a separate development that underlined long‑term confidence in London as a financial hub, Barclays has acquired its global headquarters at One Churchill Place in Canary Wharf for £750m. The UK bank purchased a 999‑year lease from Canary Wharf Group, giving it control over the 1m‑sq‑ft building beyond the current lease, which ran to 2039. The bank said the acquisition would provide “greater certainty over its long‑term occupancy costs” and allow it to continue refurbishing the building to create more flexible space as working patterns change.

Barclays chief executive C.S. Venkatakrishnan said: “This acquisition gives us long‑term certainty, greater flexibility over our London footprint and reinforces our continued confidence in London as one of the world’s leading global financial centres.” Shobi Khan, chief executive of Canary Wharf Group, hailed the deal as “a strong endorsement of both Canary Wharf and London” and pointed to the district’s efforts to diversify into life sciences and technology, as well as free festivals, open‑water swimming and go‑karting. Canary Wharf became a ghost town during Covid lockdowns and has struggled to recover fully, with HSBC and law firm Clifford Chance among those announcing moves back to the City. However, HSBC later leased extra space in the estate after increasing office‑attendance requirements, and now plans to operate from several London offices, including Canary Wharf.

Housebuilding sector under pressure

Housebuilder shares fell sharply on Monday, with Persimmon dropping 3.9% and Barratt Redrow 3.6% on the FTSE 100, after data from property portal Zoopla showed weakening demand. Zoopla reported that buyer demand had fallen by 15% year‑on‑year across the UK, with three in five homes listed since January yet to sell. It attributed the slowdown to “the combination of political uncertainty and higher borrowing costs”, noting that sales agreed were 7% below last year’s level. A change of prime minister and questions over future tax and spending priorities had added to the uncertainty, Zoopla said, but it added that the market had absorbed similar shocks before, such as the 2022 mini‑budget.

Separately, a £4.5bn class‑action lawsuit has been launched against seven major UK housebuilders – Barratt Redrow, Bellway, The Berkeley Group, Bloor Homes, Persimmon, Taylor Wimpey and Vistry Group – over allegations of anti‑competitive practices that allegedly pushed up prices for new‑build homes between October 2015 and June 2026. The claim, led by former Which? legal affairs manager Mark McLaren, follows a Competition and Markets Authority investigation that last year led the housebuilders to agree to pay £100m towards affordable housing schemes.

Energy price cap rise adds to household strain

Households will face further financial pressure from Tuesday, when the energy price cap rises by 13% to the equivalent of £1,862 a year for a typical bill. The increase, attributed to soaring global energy prices exacerbated by the conflict in the Middle East, comes as record levels of energy debt have accumulated – reaching £4.79bn in the three months to March. Adam Scorer, chief executive of National Energy Action, called the rise “a red energy warning” and warned that fuel poverty was “a public health emergency”. He urged the government to scale up debt relief through Ofgem’s Debt Relief Scheme and said energy‑inefficient homes “take lives in winter and will increasingly threaten the most vulnerable in summer”.

Political uncertainty ahead of leadership change

The economic backdrop intensifies the challenge for Andy Burnham, who is widely expected to succeed Sir Keir Starmer as prime minister. Burnham has pledged to “lift the country back up” and outlined a vision of “good growth in every postcode”, involving greater regional devolution, public ownership of utilities and a “Manchesterism” approach described as business‑friendly socialism. Susannah Streeter, chief investment strategist at Wealth Club, said the latest snapshot showed “the economy is hardly firing on all cylinders” and that Burnham faced “a supremely tricky balancing act” to boost productivity and private investment without unsettling bond markets. Chancellor Rachel Reeves has emphasised fiscal discipline and economic stability, including commitments to balance day‑to‑day spending and cut debt, but the downward revision to 2025 growth and the living‑standards fall leave little room for manoeuvre.

The Bank of England held interest rates at 3.75% for a fourth consecutive meeting in June, with some policymakers voting for a hike. Inflation fell to 2.8% in April and stayed there in May, but forecasters expect it to rise to around 3.5% by the end of the year, partly because of the energy price cap increase. Investec has lowered its peak‑inflation forecast, but the Bank of England itself has warned of rising inflation in 2026 due to the energy shock.