Warning signs abound for UK economy following strong fourth quarter

- AFP picLONDON, March 31 ― 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.

Real household disposable income - which adjusts for the impact of inflation - shrank by 0.4% compared with the previous three months, the steepest drop in almost three years.

Annual GDP growth between 2015 and 2016 was confirmed at 1.8%.

But a quick 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, just as Prime Minister Theresa May begins Britain's European Union divorce.

However, real household disposable income fell by 0.4pc in the final quarter of 2016, as Britons drove down their savings to fund purchases.

This is the lowest rate since records began in 1963.

"For consumption to continue to grow at current levels, the United Kingdom needs the savings rate to drop further".

However, the ONS warned of "a slowdown within business investment which fell by 0.9% driven by falls within the other buildings and structures and transport equipment assets".

In a further sign that household finances are coming under increasing strain from rising inflation and falling wage growth, disposable incomes also fell over the quarter.

Separate figures from the ONS showed that gross domestic product (GDP) expanded by 0.7%, in its final estimate of fourth quarter growth, matching its previous estimate but still surpassing initial readings of 0.6%.

Overall, the weaker pound helped improve the UK's current account deficit - a measure of a country's trade and earnings from overseas - which shrank to £12.1bn in the final three months of last year, a sizeable reduction on the £25.7bn figure for the third quarter of last year.

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 0.7% figure is a measure of GDP growth on the previous quarter.

But economists said this should be seen against a 1.4 percentage point drag in the third quarter, with figures for both periods distorted by trade in "erratic" items like aircraft and gold.

  • Zachary Reyes