U.K. Households Cut Back On Saving as Inflation Bites

(Bloomberg) --

U.K. households saved less of their income in the final quarter of last year to maintain living standards in an early sign of the pressures they face from runaway inflation.

The savings ratio fell to 6.8%, compared with a downwardly revised 7.5% in the third quarter and the lowest level since before the pandemic began, the Office for National Statistics said.

The figures are the latest to underscore the hit to family budgets as the soaring cost of everything from food to fuel threatens to push inflation into double digits this year for the first time in four decades.

With wages failing to keep pace, living standards are set to fall more in the coming financial year than any time since records began in 1956, according to the government's official forecasts.

“Households are entering a period where they will face a very substantial hit to their living standards with a smaller savings buffer than initially anticipated,” said Barret Kupelian, senior economist at PwC. “In the absence of further government support this could mean that household consumption is cut back further and faster than initially estimated.”

Under Pressure

Early signs of strain appeared at the end of last year, with Thursday's ONS data showing real incomes falling 0.1% over the quarter, the third quarterly decline in a row. Incomes rose by 1.3%, but this was more than offset by household inflation of 1.4%.

Net lending, the amount of money households had left over after spending and investment, shrank sharply to 3.4 billion pounds, the lowest level since the end of of 2019.

How well the economy holds up in the teeth of an unprecedented energy-price shock will depend on the willingness of people to spend more of their income and draw down an estimated 230 billion pounds ($303 billion) of excess savings built up during the pandemic, when lockdowns restricted opportunities to spend.

The Office for Budget Responsibility sees the saving ratio dropping below 3% by the end of the year, a record low and well below the 5% average prevailing before the pandemic.

That together with strong business investment should keep the economy growing, the watchdog forecasts, albeit a slower pace than previously thought.

Business investment rose 1% in the final quarter of 2021 and is now 8.6% below pre-coronavirus levels, an improvement on the earlier estimate of a 10.4% shortfall.

Consumer spending is a key driver of economic growth but the latest estimates suggest households are less resilient than thought. Consumption growth was just 0.5% in the final quarter of 2021, down from an earlier estimate of 1.2% and growth of 2.6% in the third quarter.

Spending at the end of last year was affected by the emergence of the omicron variant, which led to mass cancellations of Christmas parties and gatherings. The ONS now estimates the economy shrank 0.3% in December following gains of 0.3% in October and 0.8% in November.