House prices have dropped steadily, so homeowners are tightening their belts to offset equity losses. At the same time, inflationary pressures are squeezing real incomes. In January 2008, consumer prices were 2.2 percent higher than a year before and inflation was expected to reach three percent by the third quarter. Experts believe inflation will continue to climb as higher energy, food and import costs feed through to consumer prices. In 2008, increases in the cost of living are expected to far surpass average pay rises.
Debt is soaring too. Average household debt is said to be 175 percent of
disposable income. As a result, financial institutions tightened their lending
criteria in 2007 and no easing is anticipated in 2008. This credit crunch means
revenues are dwindling just as the Government's five year spending boom
grinds to a halt.