Consumers raid savings to keep pace with prices
British households faced a sustained squeeze on their finances at the start of the year as disposable incomes shrank and the amount set aside for savings hit record lows.
The Office for National Statistics (ONS) said real household disposable incomes fell by 1.4% in the first three months of the year, declining for the third quarter in a row.
The savings ratio also sank to 1.7% in the first quarter, down from 3.3% in the final three months of last year and hitting its lowest level since records began more than 50 years ago.
Consumers have seen their spending power come under increasing pressure from soaring inflation triggered by the collapse of the pound following Britain’s vote to leave the European Union.
The ONS said household spending had slipped to 0.4% in the first three months of this year, from 0.7% in the fourth quarter of last year.
Despite signs that shoppers are raiding money normally earmarked for their nest eggs in order to keep spending, the statistics agency said the UK economy still only grew by 0.2% in the first 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.
“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.”
Inflation hit its highest level in nearly four years at 2.9% in May, with the Bank of England expecting the cost of living to peak at 3% by the autumn.
The Bank’s governor Mark Carney stressed the Monetary Policy Committee’s tolerance was limited when it came to inflation sitting above the Bank’s 2% target.
He also hinted on Wednesday that interest rates could rise from record lows of 0.25% if wages firm and the economy is boosted by stronger business investment.
Chris Williamson, chief business economist at IHS Markit, said the pressure on consumers was “no surprise” when faced with weak wage growth and rising inflation.
He said: “The squeeze may well continue through the rest of the year, as inflation looks set to rise further.
“The big question is whether other parts of the economy can take up the slack from squeezed households.”
Separate figures from the ONS showed output in Britain’s powerhouse services sector eased back in April after seeing a drop in transport, storage and communication.
The industry, which accounts for around 78% of the UK economy, saw growth of 0.2% in April following a 0.3% expansion in March.
However, the result was enough to give economists some encouragement that UK gross domestic product (GDP) could bounce back in the second quarter after slumping from 0.7% to 0.2% between the beginning of 2017 and the final three months of last year.
Howard Archer, chief economic adviser to EY ITEM Club, said the UK economy was still set for a bumpy ride in the months ahead.
He said: “A reasonable if far from spectacular 0.2% month-on-month rise in services output in April maintains hopes that the economy may see a limited pick-up in growth in the second quarter.
“However, on most counts, the economy still seems to be finding growth a struggle, with data/survey evidence for May and June mixed.
“So while there may be some bounce in GDP growth in the second quarter, we believe the second half of the year will be challenging.”
Britain’s current account deficit – measuring the amount of money flowing in and out of the economy – was higher than expected, inflating by £4.8bn to £16.9bn for the first three months of the year.
The move comes after the UK’s trade balance widened to £8.8bn at the beginning of the year after shrinking to £4.8bn in the final months of 2016.
Mr Carney warned in the lead-up to the Brexit vote that the nation relied on the “kindness of strangers” in order to finance the country’s needs.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The current account deficit has remained much smaller than it was a year ago, but the UK’s continued reliance on overseas borrowing leaves it vulnerable to a financing shock if Brexit causes overseas lenders to lose confidence in the UK’s economic outlook.”