Housing minister to 'get Britain building again' in market crisis

Housing minister Grant Shapps has announced plans to 'build more houses' as a federation report shows ownership dropping and 'unaffordable' prices. Photograph: Lewis Whyld/PA

The housing minister, Grant Shapps, has admitted that house prices in Britain have become "too unaffordable", following a report warning that the housing market is in crisis as home ownership falls and property prices soar.

But the minister insisted that government plans would get "Britain building again" as he outlined a number of measures, including planning reforms and a release of thousands of acres of public land, designed to increase the number of homes built.

"The charge is correct. House prices are too unaffordable in this country," said Shapps. "The government's responsibility is to respond to people's aspirations and lots of people … want to own their own properties. I think the government should stand right behind them, and we will."

Shapps sought to reassure aspiring home owners who are priced out of the market, as the National Housing Federation published a study on Tuesday which forecast that ownership in England would slump to just 63.8% over the next decade – the lowest level since the mid-1980s.

The federation, which represents England's housing associations, blamed the bleak outlook on an under-supply of homes, which it warned risked locking an entire generation out of the housing market.

David Orr, chief executive of the federation, said it was time to face up to the fact that Britain had a "totally dysfunctional housing market" with home ownership in decline, rents rising rapidly, and social housing waiting lists at a record high.

Huge purchase deposits, combined with high house prices and strict lending criteria, had sent home ownership into decline in recent years, and the downward trend would continue for the foreseeable future, the federation's independently commissioned forecasts predicted.

With 105,000 homes built in England in 2010-11 – the lowest level since the 1920s – the federation called for more government investment in affordable housing.

Orr said home ownership was increasingly becoming the preserve of the wealthy, and, in parts of England, such as London, the "very wealthy".

He said: "At the heart of this crisis is a chronic shortage of new homes. Despite the overwhelming need to increase supply, house building has slumped to a 90-year low, plunging the country even deeper into the mire.

"Ministers need to make unused public land available to housing associations, local authorities must assess the level of housing need in their area, and housing has to be finally treated as a top political priority."

Doing the rounds of television studios on Tuesday, Shapps blamed a tripling of house prices, between 1997 and 2007, which put home ownership out of the reach of many. "Despite the need to tackle the deficit we inherited, this government is putting £4.5bn towards an affordable homes programme which is set to exceed our original expectations and deliver up to 170,000 new homes over the next four years."

But the NHF said this move represented a 63% cut on the previous programme of spending on homes to rent or buy.

Shapps also pointed to a government scheme to make more public land available for homes. "We are releasing enough government land to build Leicester twice over across the country – it is a massive programme. The new-homes bonus is a multibillion pound incentive to communities to build programmes, and we are hugely reforming the planning system, which is massively complex."

But Labour said that the government's changes to housing policy would make it "harder, not easier" for people to buy property.

Alison Seabeck, Labour's shadow housing minister, said: "For many months Ed Miliband has been campaigning to protect the promise of Britain – the commitment that each generation will do better than the last. The Conservative-led government are breaking this promise by cutting investment in housing and removing the requirement on local authorities to allow new homes to be built, putting renting or buying a property out of reach for far too many people."

The NHF forecast that the proportion of people living in owner-occupied homes in England would fall from a peak of 72.5% in 2001 to 63.8% in 2021. In London, the majority of people living in the capital would be renting by 2021, the number of owner-occupiers falling from 51.6% in 2010 to 44% by 2021, the NHF added.

The only English region experiencing any increase in owner-occupier numbers over the next 10 years would be the north-east, with a rise from 66.2% to 67.4%, the federation predicted.

Jenny Jones, a Green party member of the London assembly, called for better protection for the increasing numbers of people in the private rental sector as levels of home ownership declined. More and more Londoners were relying on "one of the most insecure rental sectors in Europe" where tenants were unable to resist rent hikes and were "scared to challenge slum landlords", she said.

European banks 'may have inflated balance sheets over Greek debt'

Some banks are using models instead of market values to mark down Greek assets, says the International Accounting Standards Board. Photograph: Stephan Hoeck/Getty Images/Stock4B Creative

The International Accounting Standards Board has said European banks may have inflated their balance sheets and profit and loss accounts by not taking full writedowns on distressed Greek debt.

In a highly unusual intervention, the IASB on Tuesday published a letter from chairman Hans Hoogervorst to the European Securities and Markets Authority saying that some banks were using models to mark down the value of Greek assets, where market valuations existed.

When accounting for trading assets, banks are required under International Accounting Standard 39 to use arm's-length values taken from actual transaction prices to value the assets on their books. Where trading is very illiquid and market valuations cannot be obtained, they can then use valuation models using internal estimates of value.

"There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of [accounting standards]. This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds. Those indications have now been confirmed by recently published financial reports, which show inconsistent application across Europe. This is a matter of great concern to us," Hoogervorst said in the letter.

The letter does not name the banks concerned, but the Financial Times said it related to the accounting of BNP Paribas and CNP Assurances. Both took 21% writedowns on Greek debt, much smaller than the hits suffered by other banks, including RBS, which took a 51% writedown.

"It appears that some companies are not following IAS 39 when determining whether the Greek government bonds are impaired. They are using the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required," the IASB letter said.

The IASB pointed out that trading in Greek debt was continuing and therefore any values thrown up by those transactions should be used by banks to determine impairments.

"A company cannot ignore relevant market data (including observable transaction prices) when it is clear that market participants would use that data in determining the price at which they would be willing to enter into a transaction for the financial asset."

The writedowns being taken do not reflect market prices as a result, Hoogervorst said. "It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used."

A BNP spokeswoman told Reuters: "BNP took provisions against itsGreece exposure in full agreement with its auditors and the relevant authorities, in accordance with the plan decided upon by the European Union on 21 July."

CNP declined to comment.

The IASB is responsible for setting accounting standards but not for enforcing them.

Home ownership 'to fall to mid-80s levels'

The proportion of people living in owner-occupied homes is forecast to fall to 63.8% by 2021, down from 72.5% in 2001. Photograph: Luke Macgregor/Reuters

The housing market is in crisis as home ownership tumbles and house prices soar, a study has warned.

Home ownership in England will slump to just 63.8% over the next decade – the lowest level since the mid-1980s, the National Housing Federation's forecast, published on Tuesday, said.

Huge deposits, combined with high house prices and strict lending criteria, have sent home ownership into decline, the federation said.

The housing minister, Grant Shapps, admitted that "we have not been building enough homes", but insisted the government was "in the process of reversing that through massive planning reform" and a "massive programme" involving the release of thousands of acres of public land to build new homes.

The National Housing Federation, which represents England's housing associations, warned that the housing market will be plunged into an unprecedented crisis as it also forecast steep rises in the private rental sector and a house price boom. It blamed the bleak outlook on an under-supply of homes in the UK.

The chief executive, David Orr, said: "With home ownership in decline, rents rising rapidly and social housing waiting lists at a record high, it's time to face up to the fact that we have a totally dysfunctional housing market.

"Home ownership is increasingly becoming the preserve of the wealthy and, in parts of the country like London, the very wealthy.

"And for the millions locked out of the property market, the options are becoming increasingly limited as demand sends rents rising sharply and social homes waiting lists remain at record levels."

Shapps said the reason house prices had become so unaffordable was a tripling of prices in the space of 10 years from 1997 to 2007, which put them out of reach for many people.

Asked about the study's forecast for future levels of home ownership, the minister said forward predictions were "hellishly difficult" to make and were "nearly always wrong".

He cited a Halifax survey showing that house price affordability has been "improving quite dramatically" and that prices were more affordable than any time over the last 12 years.

However, he admitted there were significant challenges for first-time buyers and said the government had a responsibility to help home ownership.

Asked about the measures being taken, he told BBC Radio 4's Today programme: "We are releasing enough government land to build Leicester twice over across the country – it is a massive programme.

"The new homes bonus is a multi-billion pound incentive to communitiesto build programmes, and we are hugely reforming the planning system, which is massively complex."

He said thousands of pages of planning guidance and law were being boiled down to about 60 pages in a reform "that even the National Housing Federation, who have produced this report this morning, approve of".

He added that he would be very disappointed if it did not achieve the goal of building more homes.

The federation forecast that, in England, the proportion of people living in owner-occupied homes will fall from a peak of 72.5% in 2001 to 63.8% in 2021.

In London, the majority of people will rent by 2021, with the number of owner-occupiers falling from 51.6% in 2010 to 44% by 2021, it said.

The north-east will be the only English region to see any increase in owner-occupier numbers over the next decade, rising marginally from 66.2% to 67.4%, the federation predicted.

Meanwhile, the average house price in England will rise by 21.3% over the next five years from £214,647 in 2011 to £260,304 in 2016, according to Oxford Economics, which was commissioned to produce the forecasts.

Average rents in the private sector are forecast to increase by 19.8% over the next five years, fuelled by high demand and a shortage of properties.

About 4.5 million people are currently on social housing waiting lists, but only those in the most desperate of circumstances have a realistic chance of being allocated a home.

The federation said that, in 2010-11, 105,000 homes were built in England – the lowest level since the 1920s.

Consumer confidence tumbles amid debt crises and market upheaval

A shopper on Broadway, New York. Photograph: Chris Hondros/Getty Images

Debt crises and financial market turmoil have triggered sharp falls in consumer confidence in Britain, the rest of Europe and the US, threatening to plunge western economies into a downward spiral. Pessimism among Britons has reached levels usually seen in a recession, while US consumer confidence tumbled to the lowest in two years.

Economists and government officials say the eurozone is being affected by the recent market turbulence caused by growing fears that some governments, led by Greece, could default on their debts. Stock and bond markets have fallen sharply in recent weeks, amid concerns that efforts by eurozone government leaders are not enough to contain the crisis.

Confidence in the US also fell sharply by almost 15 points to 44.5, according to the Conference Board's monthly gauge. This is the lowest level since April 2009 and worse than analysts had expected.

"This is just so ugly," Tom Porcelli, US economist at RBC Capital Markets in New York, told Reuters. "Should we even be surprised by this? Slipping into levels we saw during the recession – that's where the consumer psyche is. They are wondering out loud whether the economy is slipping back into a recession."

A closely watched index measuring UK consumer confidence from GfK NOP dropped for the third month in a row to hit -31 in August, 13 points below a year ago and one point lower than July. The index also hit -31 in April this year, but bounced back the following month boosted by sunny weather and the royal wedding.

Previously, it had only been as low on two other occasions – during the downturn of 2008-2009 and in the early months of 1990. On both occasions the decline in consumer confidence mirrored a slide into recession, noted Nick Moon, managing director of GfK NOP Social Research.

"With an increasing number of indicators suggesting the economy is either stagnating or returning to recession, the continuing loss of consumer confidence is a major worry for the government," he added. "However, despite the four-point drop in consumers' general view of the economic situation over the next 12 months, there has been a small improvement in how they view their own financial situations, indicating people are starting to adapt to the austere economic climate."

The royal feel-good factor has clearly worn off as the US and eurozone debt crises deepened, triggering fears the world economy could slide back into recession. Britons are putting off buying big items such as a car or house, with the major purchases measure staying at -31, down 11 points from a year ago.

In the eurozone, business and consumer confidence declined for the sixth month. The European Union's economic sentiment index fell by 5 points to 97.3 for the EU, and by 4.7 to 98.3 for the 17 countries using the euro, taking the index below its long-term average of 100. Germany, Europe's largest economy which has been the main engine of growth in the past year, suffered the biggest drop.

François Cabau, European economist at Barclays Capital, said: "For the first time since December 2008, both headline business and consumer confidence fell by more than three points. In a month affected by volatile market behaviour, we believe that the deepening of the sovereign debt crisis, combined with the material loss of momentum in the real economy, risks plunging confidence indices into a self-sustaining negative spiral."

Unemployment expectations rose 9.4 points to 25.5, the highest index level since July 2010. Perceptions of the general economic situation in the next 12 months have worsened sharply too, to -23.4 from -14.2, the lowest level since July 2009.

The 5 big hurdles on the road to lasting economic recovery

A home for sale in Haight Ashbury, San Francisco. The US housing crisis is a destabilising influence on the global economy. Photograph: Robert Galbraith/Reuters

The first indications of the damage caused by the financial turbulence of the past few weeks will be seen on Wednesday, with the manufacturing figures from around the globe. These purchasing managers' indices are closely watched as indicators of industrial orders, and output and any readings markedly below 50 will sound recessionary warning bells.

At the Bank of England, as at the US Federal Reserve and the European Central Bank, there is a weary acceptance that the recovery from the recession of 2008-09 has received yet another setback. Even so, the view is that after a tough few months, the pace of growth will pick up gradually in 2012.

There are alternative views. Nouriel Roubini, the Dr Doom of economics forecasting, told the Wall Street Journal earlier this month that Marx was right when he said capitalism could destroy itself by continually shifting income and wealth from labour to capital.

The greens say it proves that EF Schumacher had it right when he wrote Small Is Beautiful almost four decades ago, and that the world is now being pushed beyond its carrying capacity by an orgy of excess.

The Austrian school of economics says that the sluggish global economyis the result of central bank governors and finance ministers ignoring the teachings of economists Friedrich Hayek and Joseph Schumpeter. Rather than prop up failed banks, policy makers should have let them go bust. The consequence of not doing so is that the west now has a motley collection of zombie banks that are not fit for purpose.

Finally, there are the followers of John Maynard Keynes, who say the problem is that there was a dangerous reversion to economic orthodoxy once the global economy started to recover in the spring of 2009. The Keynesians see the solution as more quantitative easing, less fiscal austerity and public infrastructure projects to kickstart demand.

History would suggest that Sir Mervyn King, Ben Bernanke and Jean-Claude Trichet are right to be cautiously optimistic. Over the past 250 years, industrial capitalism has displayed a remarkable ability to regenerate itself. The mainstream view is that it will do so again, even though the severity of the shock to the financial system means the process will be slower than usual.

But confidence has been dented in recent months as it has become clear that the road to lasting recovery is obstructed by five big hurdles.

1. Europe's debt crisis

Easily the biggest short-term challenge currently is the need to sort out Europe's sovereign debt crisis. King has identified Europe as the biggest threat to Britain's economic prospects and the Bank can already detect evidence that the bickering over Greece's bailout, the perceived vulnerability of Italy and Spain, and fears that already weakened banks could be wiped out by losses on eurozone bonds is having an impact on the willingness of banks to lend. There are already echoes of 2007-08, when interbank lending dried up and the cost of insuring banks against default rose sharply.

The duration and depth of the crisis in Europe mean financial markets are no longer going to be mollified by stop-gap solutions. They want to see the size of Europe's bailout fund massively increased; they want the Germans to agree to common European bonds in order to provide collective security for the weaker members of monetary union; and they want Europe to move quickly towards full economic union. It is not just dealers on Wall Street and the City who see closer integration as the alternative to collapse: George Osborne believes that too.

2. The US housing market

The second obstacle is the American housing market, which has seen a deeper slump over the past five years than was suffered during the Great Depression. Prices are still falling and with a quarter of households in negative equity and mortgage arrears on the rise, consumers feel progressively less well off and that makes them reluctant to spend. The Federal Reserve's quantitative easing programme is designed to help homeowners by driving up the cost of US Treasury bonds, which reduces the interest rates paid on the money Washington borrows. Lower bond yields feed through into cheaper fixed-rate mortgages.

But the desire of consumers to pay down their debts means QE has so far proved ineffective as a cure for the woes of the real estate market. Other more radical solutions are now being canvassed such as federal loans for those homeowners whose mortgages are under water to cover the negative equity. While politically attractive to the Obama regime, this would have trouble getting through Congress even if the programme involved Washington getting a slice of the proceeds when house prices start to rise once more.

3 and 4. Global imbalances

Giants three and four are the two aspects of globalisation that were at the root of the crisis in the first place – the imbalances between creditor and debtor nations, and the financial system.

Little progress has been found through official channels – the International Monetary Fund and the G20 – to deal with the former, running the risk that the global economy will find a new equilibrium through debtor countries deflating rather than through creditor countries reflating. Economists at Lombard Street believe the key imbalance – between China and the US – may eventually be resolved by rising prices in China, which is pushing up the real (inflation-adjusted) exchange rate. Other analysts believe China's continued trade surplus with the US will fan protectionist pressures.

The good news on the global financial system is that banks have spent the past three years building up their capital. Prudential oversight has also been strengthened in countries like Britain through the Bank of England's financial policy committee. The bad news is that flows of credit to the new businesses that will generate the next economic upswing are still lacking. And the regulatory reforms necessary to prevent a future speculative frenzy are incomplete.

5. Oil prices

Finally, there are oil prices. Despite the slowdown of recent months, a barrel of Brent crude is still changing hands for more than $110, five times its price a decade ago. The expectation is that the cost of energy will come down over the coming months, boosting the spending power of consumers. But a return to the 1990s – when oil at $10 a barrel was one reason for strong global growth – appears to be over for good.

Faced with these five challenges – sovereign debt in Europe, a bombed-out US real estate market, an under-valued Chinese currency, a dysfunctional banking system and high oil prices – it is little wonder policy makers are mulling over what more they can do to keep the recovery going. The global economy has slowed to a stall; it would not take much for it to crash land.

Vince Cable: disingenuous bankers are trying to derail reforms

Vince Cable: 'Banks are in a way trying to create a panic around something which they know has got to happen.' Photograph: Steve Parsons/PA

Vince Cable has accused bankers of using the economic turmoil in Europe to try to derail reform of the financial sector.

The business secretary said that "louder and louder voices" were being raised among some of the big British banks giving warning that regulatory change in Britain would put the recovery at risk.

The Independent Commission on Banking is expected to recommend separating banks' retail operations from their investment arms when it reports on 12 September.

There have been attacks on the proposals from the director general of the CBI, John Cridland, and British Bankers' Association's chief executive, Angela Knight.

Cridland has said taking action to reform the banks now would be "barking mad", while Knight warned imposing the measures on lenders risked denting confidence and cutting the supply of credit.

However, Cable said in an interview with the Times that the fact that there were still fears about the collapse of big financial institutions was "all the more reason for grappling with this issue".

"It is disingenuous in the extreme to use the current context to argue against reform. Banks are in a way trying to create a panic around something which they know has got to happen," he said.

Cable has long favoured the separation of retail and investment banking. He added: "The governor of the Bank of England and many other people have been arguing that we have to deal with the 'too big to fail' problem. We can't have big global banks with balance sheets bigger than British GDP underwritten by the taxpayer; this can't go on and it has got to be dealt with."

The business secretary also said that he did not expect another 2008-style meltdown in the banking sector, but acknowledged that difficulties could still lie ahead for the British economy.

"To my mind, the greater worry is not a massive financial crisis again but it is a general slowing down of western economies, with all the problems that presents for employment and long-term dynamism," said Cable.

In comments reported in the Financial Times, Cridland had said: "Taking action at this moment – this moment of growth peril, which weakens the ability of banks in Britain to provide the finance that businesses need to grow – is just to me barking mad."

He added that a perceived political need for action after banks were bailed out in 2008 was driving the scale and pace of reform, and warned that "there's an own goal here about to be scored if we get this wrong".

European bank stocks plunge as investors shun risk

The Swiss bank's analysis of reserves and likley profits concludes investing in Greek banks could be costly. Photograph EPA

Credit Suisse, the Swiss bank, has warned investors against buying shares in Greek banks. It was a conclusion reached after lengthy analysis of bank reserves, likely profits and relationship to the ailing Greek economy. But it hardly seemed necessary – there can be few investors queueing up to add Greek bank stock to their portfolio.

That is the case for most European banks. Share prices have dived since last year and despite a few mini rallies, remain depressed. In March Credit Agricole shares topped €12; last week they were just above €6. BNP Paribas shares have slumped from €58 to €32.

The comments of Christine Lagarde, head of the International Monetary Fund, will have done little to calm jittery nerves. She said Europe's banks needed to call on their shareholders for more money to boost their capital buffers and prevent another credit crunch tipping them into bankruptcy.

UK banks are in the same boat. Lloyds Banking Group, which includes Halifax, went above 78p a share last September. Last week it was trading down 56% at 28p. Barclays reached a post-crash peak of 377p in August 2009 and remained above 300p until April this year when it began a slide that leaves the bank stock now struggling at 145p.

But it is the German institutions that have taken the greatest pounding. Commerzbank, Germany's second largest bank, has lost two thirds of its value since March when its share price stood above €6. Its larger rival,Deutsche Bank, has dropped almost 50% from a high of €50 to less than €27 a share.

Analysts argue the German banks face a three-way squeeze. Holdings of financial instruments have been left almost worthless by the Greek crisis. In the never-ending chain that is modern capitalism, German banks have lent funds to institutions that in turn hold Greek sovereign and corporate bonds and other financial instruments such as credit default swaps that insure transactions by Greek companies.

Secondly, there is the struggle to improve profits when European economies are slowing. And thirdly, there are the difficulties faced by the government now most investors believe Berlin will find itself insuring the debts of most peripheral eurozone countries within the next couple of years, whether the German electorate likes it or not.

The generally held view that Greece, Portugal, Spain and Italy will need vast amounts of financial aid from Berlin via the European Central Bank's lending facility has sent the cost of insuring German sovereign bonds soaring and had knock-on effects for banks.

Investors are expected to remain wary of supporting European banks while politicians wrangle among themselves over the extent of the Brussels' bailout fund, the European Financial Stability Facility.

The US has similar difficulties. Bank of America, the largest bank in the US, has seen its share price halve this year to less than $8. Before the crash its value was based on a share price north of $50. Citigroup has dived from $50 to $30 a share and Wells Fargo, considered one of the better capitalised banks, has dropped from $34 to $24 a share.

As in many western countries, many of the worst-hit financial institutions remain in government hands. The biggest mortgage lenders in the US, Fanny Mae and Freddie Mac, are still government owned and in effect bust without federal support.

Germany's Hypo Real Estate bank is in government hands after a €50bn bailout and the UK's Royal Bank of Scotland and Lloyds are still partly nationalised. French banks have escaped, though analysts remain nervous that lending to Latin countries leaves them vulnerable to default.

Warren Buffett, the maverick US investor, has stepped in with a $5bn investment to boost Bank of America's reserves. He expects to make a sizeable return on his capital much as he did following a $10bn injection into Goldman Sachs at the height of the crisis in 2008. But most investors are expected to wait for an economic upturn and political resolution before following his example.

Christine Lagarde calls for European banks to find more capital

Christine Lagarde, head of the IMF, warned of the risks of another global downturn and said banks need ‘urgent recapitalisation’. Photograph Michael Reynolds/EPA

The British Bankers' Association (BBA) has thrown its weight behind a call from Christine Lagarde, head of the International Monetary Fund, forEuropean banks to be forced to recapitalise to help prevent anotherfinancial crisis.

Fears of a sequel to the 2008 credit crunch are growing because of banks' exposure to weak economies in the eurozone, where countries such as Italy, Spain and Greece are struggling to maintain international investor confidence.

Angela Knight, chief executive of the BBA, said that she agreed with Lagarde, who suggested at the weekend that European banks should be forced to accept capital injections.

Knight said: "I think she is right: some European banks should hold more capital as action is urgently required to stabilise the situation inside the eurozone." But she thought that British banks would not have to recapitalise "because they already did so in 2009-10" and that further strains on the banking system were "more apparent on the continent than here".

But Knight admitted that if Europe lurched into a significant slowdown and the US also faltered, "even British banks will be minded to hoard cash" rather than lend it to companies and individuals. "One could envisage a situation where there would be less readily available credit from the UK banks."

Knight added that British banks could also withdraw capital if the upcoming Independent Commission on Banking orders a split of banks' deposit-taking arms from their investment banking operations.

Lagarde's comments about European banks were made at a central bankers' meeting at Jackson Hole in the US, against a backdrop of concern that some eurozone institutions are being shut out of international money markets.

There is no evidence, however, that UK banks are finding it hard to borrow and Knight said American lenders tended to trust UK banks, "but were far more wary of European institutions".

In one of her strongest warnings yet about the risk of a new global slowdown, Lagarde also said US policymakers should do more to ensure that house prices were not hit by another downward spiral.

The IMF managing director said European banks must be strong enough "to withstand the risks of sovereigns and weak growth. This is the key to cutting the chains of contagion. If it's not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis."

Lagarde spoke after a grisly August in the financial markets when nearly $6tn (£3.7tn) was wiped off the value of global equities amid concern that growth is slowing and governments will be unable to tackle their debt burden.

UBS and Citigroup recently lowered their forecast for global growth, with sharp reductions to its eurozone view and more modest cuts for China, but ruled out the likelihood of a recession for now.

The cuts are the latest in a series of downgrades to global growth forecasts by major securities firms. Morgan Stanley has also cut its global growth view, but was even more bearish: it said the US and the eurozone were "dangerously close to recession".

Household finances squeezed by food and travel costs as inflation continues to rise

Consumers are restricting their spending, helping to depress the retail industry and UK economy. Photograph: Graham Turner for the Guardian

The soaring cost of food and transport left households £11 a week worse off last month than they were a year ago, according to a survey that reveals the erosion of family spending power.

The average UK household had £166 a week of discretionary income to spend in July, according to the Asda Income Tracker – 6.4% lower than at the same time last year.

Family budgets were squeezed after the cost of travelling increased by 16.5% year on year, according to figures from the AA motoring organisation, while food prices remained high despite food price inflationeasing marginally.

The Asda survey is likely to put pressure on the chancellor, who hascome under fire from business groups and some of his own MPs to boost growth.

Ed Balls, the shadow chancellor, said that George Osborne needed to act to stimulate the economy, which has failed to grow for almost a year.

A forthcoming slew of business surveys will indicate the health of the construction and manufacturing industries. Separate figures from the British Bankers' Association are expected to show that small businesses are struggling to persuade banks to release much-needed cash for investment.

The rate of inflation as measured by the consumer prices index increased to 4.4% in July, from 4.2% in June, with conditions in the labour market also worsening.

Osborne is known to believe that while a combination of wage freezes and inflation has eaten into family incomes, low interest rates have protected 12 million homeowners, who are paying mortgage rates far lower than before the 2008 banking crash. The Bank of England has signalled that rates will remain low for the rest of the year. Many analysts believe they will remain at 0.5% for much of 2012.

The British Chambers of Commerce said over the weekend that the Bank of England should add to its support of the economy with a further round of quantitative easing (QE).

The purchase of government bonds under the QE programme is designed to boost bank balance sheets and promote lending. Up to now, high-street banks have faced criticism for hoarding the proceeds of QE.

Andy Clarke, Asda's chief executive, said that families were under pressure to restrict spending to essentials. "The maths is simple – the rising cost of feeding the family, getting around and increasing unemployment add up to the biggest squeeze on families since the last recession," he said.

The retailer found customers were trying to economise by half-filling petrol tanks and cutting their own hair instead of visiting hairdressers.

July's inflation figures from the Office for National Statistics showed that the cost of clothing and footwear went up by 3.1% year on year – the highest annual surge since records began in 1997.

The cost of water, electricity and gas increased by 4.6% on an annual basis, the highest increase in two years. British Gas, E.ON, npower, ScottishPower and Scottish and Southern Energy have all unveiled price increases in the past few weeks.

Charles Davis, managing economist at the Centre for Economics and Business Research, a thinktank, said: "Pressure on household finances continued to mount up in July as the cost of essential spending grows rapidly while wage increases remain slow."

The pressure on commuters' budgets will further increase when rail fares rise by an average of 8% from January.