Pay rises set to lift economy as Britain’s borrowing binge eases
RISING wages mean families can start to spend and save more, supporting the economy without the reliance on the heavy borrowing of the past two years.
Economists hope the weak GDP growth of 0.2pc in the final quarter of 2018 will mark a low ebb, with the expansion to accelerate a touch into 2019.
Ultra-low unemployment means more workers have an income to spend and puts pressure on employers to hike wages. Combined with a fall in inflation it means family finances are getting back on track after a spell of weakness that led to a spate of borrowing.
Households have been net borrowers for more than two years, an unprecedented length of time, as traditionally families save more than they borrow.
In normal times this provides a pool of funds that banks lend to businesses. But for nine consecutive quarters households have borrowed more than they saved, helping to support the economy by spending more but also leaving the country reliant on funds from foreign investors – “the kind- ness of strangers”, in the words of Mark Carney, Governor of the Bank of England.
The fall in the pound has made little difference to the UK’S trade deficit, which creates this need to borrow. “Brexit uncertainty has made overseas customers reluctant to source goods from British firms, and the UK’S demand for imports is price insensitive,” said Samuel Tombs at Pantheon Macroeconomics.
Household net borrowing narrowed a touch over 2018 as disposable real incomes increased by 1pc. Annual wage growth in December stood at 1.4pc.
This helped the nation’s savings ratio, defined as the proportion of income not spent on consumption, edge up from 3.9pc in 2017 to a still weak 4.2pc.
Bank of England data showed a rise in deposits to interest-bearing savings accounts, as well as sustained confidence in housing. A total of 64,337 home purchase mortgages were approved last month, a dip from 66,696 in January but up slightly on the numbers approved in February of 2018.
Consumer credit growth slowed, indicating a falling reliance on loans. Credit card lending grew by 6.5pc on the year, its slowest since late 2015.
Consumer spending was a key contributor to growth at the end of 2018, despite a small downgrade in ONS estimates, as was government spending, while business investment fell for a fourth consecutive quarter. A drop in goods exports and rise in imports hit growth.
Andrew Wishart at Capital Economics said: “The figures released today illustrate that if a no-deal Brexit is avoided, solid consumer spending can underpin a strengthening in the economy.”