UK households have been hit by a real cut in pay, rising cost of living, and government welfare slashes (Reuters)

UK households are the least pessimistic about their financial situation for almost three and a half years.

Markit's Household Finance Index notched up to 40.8 in June, from the previous month's 40.4, the highest point since February 2010. Any number over the neutral 50 represents optimism, while a reading under signifies pessimism.

Despite falling incomes, as a rising cost of living, a real cut in pay, and welfare slashes, the growing sense that the economy is at the start of a recovery has boosted sentiment among some households.

"Improving household finance trends are an early indication that the UK economy has continued to strengthen in June. Households' perceptions of financial stability are now at a level unsurpassed over the past four-and-a-half years," said Tim Moore, senior economist at Markit and author of the report.

"Better labour market conditions helped reinforce the upturn in households' financial expectations during June, as rising levels of workplace activity translated into diminishing job insecurities.

"However, income from employment dipped at the fastest pace for five months, highlighting that pay restraint remains the order of the day. With households receiving little in the way of wage rises over recent months, a fall in inflation perceptions to their lowest since mid-2010 was an important factor in alleviating some of the strain on finances during June."

Research by the Institute for Fiscal Studies (IFS) found that twenty-something Britons have suffered a worse fall in income since the recession than any other age group in the economy.

The study found that median household income for adults in their 20s plunged by 12% from 2007 to 2012, as the age group's employment rates fell sharply.

It also revealed that the over 60s had been the only group to see their incomes rising since the outbreak of the financial crisis, with annual growth of around 2-3% in the median income.

Separate IFS research found that wages have plunged since the financial crisis because more people are being forced to return to work after enduring welfare cuts and there are fewer unionised workers.

"The falls in nominal wages that workers have experienced during this recession are unprecedented, and seem to provide at least a partial explanation for why unemployment has risen less - and productivity has fallen more - than might otherwise have been expected," said Claire Crawford, programme director at the IFS and managing editor of its Fiscal Studies journal.

Wages have failed to keep pace with sticky inflation, which has hovered above the 2% target since the end of 2009. In February, real pay suffered its slowest rate of growth since records began, rising by just 1%. In the same month, CPI inflation was 2.8%.

There are signs that the economy is beginning to recover. Improving output in the private service, construction, and manufacturing sectors suggests 0.6% growth in the second quarter, after a 0.3% GDP expansion in the opening three months.