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UK households run down savings to record low in warning sign for economy

By William Schomberg and Andy Bruce | LONDON

British households ran down their savings to a record low in late 2016 as they faced a fall in their spending power, a warning sign for the economy as Brexit gets underway.

In another indication that the economy has lost some of its resilience following last June’s shock vote to quit the European Union, official data showed the dominant services industry contracted in January for the first time since March last year.

The Office for National Statistics confirmed gross domestic product grew by 0.7 percent in the October-December period compared with the previous three months, in line with what a Reuters poll of economists had predicted.

But compared with the fourth quarter of 2015, growth was lowered slightly, to 1.9 percent from a previous estimate of 2.0 percent.

Britain’s economy last year defied forecasts that it would slow sharply after the referendum decision to leave the EU.

But a steep rise in inflation, caused in part by the fall in the value of the pound since the Brexit vote, is expected to crimp spending by consumers, the main drivers of the economy.

Friday’s data showed real household disposable income — which includes wages and welfare benefits minus taxes and the impact of inflation, among other factors — shrank by 0.4 percent in the October-December period of last year compared with the previous three months. That was the steepest drop in nearly three years.

The savings ratio sank to 3.3 percent, its lowest level since records began in 1963, the ONS said.

ONS statistician Darren Morgan said the fall in the savings ratio was partly due to the holdings of pension funds rather than any significant changes in the real incomes of households.

Separate data published earlier on Friday showed British house prices fell in monthly terms for the first time since mid-2015 in March, a sign of increasing caution among households as Britain prepares to leave the EU.

Companies are also wary. The ONS said business investment fell by 0.9 percent in quarterly and annual terms in the fourth quarter, roughly in line with a previous estimate.

While the fall in the value of the pound is hurting consumers, it is helping to ease one of the British economy’s biggest vulnerabilities — its wide balance of payments deficit with the rest of the world.

The ONS said the current account deficit more than halved in the fourth quarter to 12.1 billion pounds — falling by more than expected in the Reuters poll — and stood at 2.4 percent of GDP, down sharply from 5.3 percent in the third quarter.

The deficit had been expected to improve as the fall in the pound increased the value in sterling of British investments held abroad and helped exporters.

(Writing by William Schomberg; Editing by Catherine Evans)

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