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Britons' savings at record low as household incomes drop, says ONS Household income falling at fastest rate since 1976 as UK savings rates crash
(about 7 hours later)
Households in Britain have run down their savings to a record low in an attempt to maintain their spending in the face of falling living standards, according to official figures. The consumer-driven momentum that has kept the British economy afloat since the Brexit vote is declining rapidly, with new data showing households in the grip of the most protracted squeeze on living standards since the economic crisis of the mid-1970s.
The Office for National Statistics reported that during the first three months of 2017 the savings ratio – a measure of how much money individuals are putting away for retirement or a rainy day out of their disposable income – fell below 2% for the first time. Against a backdrop of rising prices and stagnant wage growth, incomes adjusted for inflation have now fallen for three successive quarters, the first time this has occurred since the International Monetary Fund had to bail Britain out in 1976.
But the ONS added that, despite the fall in the savings ratio, individuals also spent less in the shops and on going out, contributing to a sharp slowdown in the UK economy, from 0.7% growth in the final quarter of 2016 to 0.2% in the following quarter. At the same time, the amount being set aside as savings has now slipped to just 1.7% of disposable income – the lowest level on record, and a fraction of the near-10% average for the last 50 years. Just a year ago, it was more than three times the current rate.
Chris Williamson, chief business economist at IHS/Markit, said: “The main drag seems to have come from weaker household spending growth, which dropped from 0.7% late last year … which can in turn be at least partly linked to a third consecutive quarterly fall in real household disposable income – its worst run since the 1970s, according to official statisticians.” The new data from the Office for National Statistics shows that in the first three months of 2017, the mounting financial pressure on consumers brought the UK’s strong performance following last summer’s Brexit vote to an abrupt halt.
On Thursday, separate figures showed an unexpected jump in consumer credit. Households borrowed an extra £1.7bn in May - £300m more than had been expected – on credit cards, personal loans and car finance. A survey of consumer confidence also showed a steep decline.
Despite saving less and borrowing more, consumers still reined in their spending, contributing to economic growth confirmed today at just 0.2% – the lowest of any of the major G7 industrial nations.
Spending in the shops, new car sales and property transactions have all showed signs of weakness, and the Bank of England has expressed concern about rising levels of consumer debt.
Monthly health checks on manufacturing, construction and services due next week will be scrutinised for signs that the hung parliament is now having an impact on business confidence, but the ONS figures show that the economy was already fragile when Theresa May called the general election.
Real household income in the UK – a measure of spending power adjusted for movements in prices – fell by 1.4% in the first three months of 2017, following falls of 0.3% in the third quarter of 2016 and 0.4% in the fourth quarter.
The only recent parallel for such a prolonged squeeze occurred four decades ago, when a combination of a sterling crisis, pay restraint and public spending cuts agreed with the IMF resulted in real household income falling by around 6% between the fourth quarter of 1976 and the second quarter of 1977.
In the City, the pound fell back below $1.30 amid speculation that the Bank of England would be wary of adding to consumer pain by raising interest rates.
Sterling had been edging higher after remarks by Threadneedle Street’s governor, Mark Carney, were seen as a hint that the first increase in interest rates in a decade would soon be announced.
The ONS said that during the first three months of 2017, the savings ratio – a measure of how much money individuals are putting away for retirement or a rainy day out of their disposable income – fell below 2% for the first time. But it added that, despite the fall in the savings ratio, individuals also spent less in the shops and on going out, contributing to the sharp slowdown in the UK economy, from 0.7% growth in the final quarter of 2016.
Chris Williamson, chief business economist at City data group IHS/Markit, said: “The main drag seems to have come from weaker household spending growth, which dropped from 0.7% late last year … which can in turn be at least partly linked to a third consecutive quarterly fall in real household disposable income – its worst run since the 1970s, according to official statisticians.”
Frances O’Grady, the TUC general secretary, said: “These figures make for grim reading. People raiding their piggy banks is bad news for working people and the economy. But with wages falling as living costs rise, many families are having to run down their savings or rely on credit cards and loans to get through the month.”Frances O’Grady, the TUC general secretary, said: “These figures make for grim reading. People raiding their piggy banks is bad news for working people and the economy. But with wages falling as living costs rise, many families are having to run down their savings or rely on credit cards and loans to get through the month.”
The UK’s balance of payments also fell deeper into the red in early 2017 as the trade gap in goods widened and the surplus in services widened.The UK’s balance of payments also fell deeper into the red in early 2017 as the trade gap in goods widened and the surplus in services widened.
The one bright spot for the government from a downbeat set of economic statistics was news of a modest pick-up in activity in the services sector in April. With services accounting for 79% of the economy, this raised the prospect of overall growth rising in the second quarter. Williamson said he was expecting growth of 0.4% in the three months ending in June. The one bright spot for the government from a downbeat set of economic statistics was news of a modest pickup in activity in the services sector in April. With services accounting for 79% of the economy, this raised the prospect of GDP growing in the second quarter.
Darren Morgan, ONS head of GDP, said: “GDP growth for the first three months of 2017 remained unrevised at 0.2%. Growth was driven by business services and construction, partially offset by declines in some consumer-focused industries, such as retail sales and accommodation. Darren Morgan, ONS head of GDP, said growth in the first quarter of 2017 was driven by business services and construction, with declines in some consumer-focused industries, such as shops and hotels. “The saving ratio has fallen again this quarter to a new record low, partly as a result of higher tax payments reducing disposable income. Some of the fall could be as a result of the timing of those payments, but the underlying trend is for a continued fall in the saving ratio.”
“The saving ratio has fallen again this quarter to a new record low, partly as a result of higher tax payments reducing disposable income. Some of the fall could be as a result of the timing of those payments, but the underlying trend is for a continued fall in the saving ratio. The balance of payments – which measures trade flows, income from investment, and payments to international bodies such as the EU – was in deficit by £16.9bn in the first quarter of 2017, an increase from £12.1bn in the previous three months. The ONS said the UK’s poor trade performance wiped 0.8 percentage points from growth in the first quarter.
“Services output in April was up slightly on the month, with the largest contribution to the month-on-month growth coming from the retail trade.” Some deterioration had been expected in the City after the sharp narrowing of the deficit in late 2016, and analysts said the fall in the value of sterling – which makes exports cheaper and imports dearer – should help the balance of payments.
The balance of payments – which measures trade flows, income from investment and payments to international bodies such as the EU – was in deficit by £16.9bn in the first quarter of 2017, up from £12.1bn in the previous three months. The ONS said the UK’s poor trade performance subtracted 0.8 percentage points from growth in the first quarter.
Some deterioration had been expected in the City after the sharp narrowing of the deficit late last year and analysts said the fall in the value of sterling – which makes exports cheaper and imports dearer – should help the balance of payments.