U.K. Saving Ratio Falls to Record Low as Squeeze Takes Toll

(Bloomberg) -- The pressure on consumers from the soaring cost of living was laid bare Friday as Britain published its most complete picture of the economy in the first three months of the year.

Britons saved a smaller proportion of their incomes than at any time on record and household incomes adjusted for inflation fell for a third straight quarter, the longest stretch in 40 years, the Office for National Statistics said.

U.K. Saving Ratio Falls to Record Low as Squeeze Takes Toll

Gross domestic product as a whole grew an unrevised 0.2 percent, the weakest in a year. Consumer spending, which kept the economy going in the aftermath of the Brexit vote, grew at half of the pace of the previous quarter. The pound fell.

Separate figures showed the current-account deficit widening, though remaining well below recent quarterly averages.

For Bank of England Governor Mark Carney, the debate over when to raise interest rates hinges among other things on whether business activity picks to compensate for the weakness of consumer spending.

Friday’s figures show business investment rising an annual 0.7 percent, the best performance in more than a year. There was also some good news from the dominant services industry, where retailers helped output grow 0.2 percent in April. That puts the economy on course for 0.4 percent growth in the second quarter and keeps open the possibility of a rise in the U.K. benchmark rate when policy makers next meet on Aug. 3, according to Scotiabank economist Alan Clarke.

“The BOE rate call for August is still on a knife edge,” Clarke said. “We were hoping for a clear-cut signal, but didn’t get one. Unfortunately, that is going to leave us in agony for another month” as any data in that period could tip the balance, he said.

Confidence Slides

The low level of the saving ratio, now clearly below 2 percent, means households have little in reserve as they are forced to spend more and more simply to maintain the same standard of living. A GfK report Friday showed consumer confidence falling to its lowest level since just after the Brexit vote, with this month’s inconclusive election adding to people’s concerns.

The pound fell against the dollar and was at $1.2979 as of 12:50 p.m. London time, down 0.2 percent on the day.

The ONS figures show:

  • The saving ratio fell to 1.7 percent, the lowest since records began in 1963, from 3.3 percent in the previous quarter and “the underlying trend is for a continued fall,” according to the ONS. Higher taxes reducing disposable income partly explain the latest decline.
  • Real household disposable income fell 1.4 percent, the biggest decline since the first quarter of 2013. Real incomes last fell for three straight quarters between 1976 and 1977. Real income per head dropped 1.6 percent and was down 2.1 percent from a year earlier -- the biggest annual decline in more than five years.
  • Consumer spending rose an upwardly revised 0.4 percent versus 0.7 percent growth in fourth quarter. Services rose a downwardly revised 0.1 percent, with business services barely offsetting declines in consumer-facing industries such as retail and accommodation.
  • Net trade knocked 0.8 percentage point off GDP.
  • GDP grew 2 percent from a year earlier. Annualized growth in the first quarter stood at 0.9 percent compared with 1.4 percent in the U.S.
  • The current-account deficit widened to 16.9 billion pounds ($22 billion), or 3.4 percent of GDP. The deficit in the previous quarter was 12.1 billion pounds.
  • Trade deficit widened sharply to 8.3 billion pounds, though the previous quarter was flattered by non-monetary gold leaving the U.K. 
  • The income deficit -- the gap between what British investors earn on their foreign investments and what foreigners earn on their investments in Britain -- grew to 2.5 billion pounds.

While a weaker sterling is aiding the current account for now, the BOE has highlighted the risks posed by Britain quitting the European Union.

“The U.K. relies on the kindness of strangers at a time when risks to trade, investment and financial fragmentation have increased,” Carney said in a speech this month.