British households ran down their savings to a record low at the end of 2016, raising fears that the UK is on course for a fresh consumer debt crisis in the wake of the Brexit vote.
The saving ratio – which estimates the amount of money households have available to save as a percentage of their total disposable income – fell sharply in the fourth quarter last year to 3.3% from 5.3% in the third.
It was the lowest since records began in 1963, according to the Office for National Statistics (ONS), and suggested that people are increasingly dipping into their savings to maintain spending at a time when prices are rising. A fall in disposable incomes over the fourth quarter also raised concerns that people will increasingly rely on debt-fuelled spending as a squeeze in living standards takes hold.
“Today’s figures should set alarm bells ringing. The last thing our economy needs right now is another consumer debt crisis,” said the TUC general secretary, Frances O’Grady. “But with wage growth stalling and prices rising, many households are having to rely on credit cards and loans to get through the month. People raiding their piggy banks and borrowing more than they can afford is what helped drive the last financial crash.”
This week, the Bank of England said rapid growth in consumer credit, underpinned by an acceleration in credit card borrowing, was one of the main threats to the UK banking system. Real household disposable income, which adjusts for inflation, shrank by 0.4% compared with the previous three months, the steepest drop in nearly three years.
UK economic growth since the financial crisis has been heavily reliant on consumer spending. The ONS confirmed that the wider UK economy grew by 0.7% between October and December, but economists said a weaker consumer backdrop could hinder growth in the coming months. Growth in 2016 was unrevised at 1.8% as the ONS updated its estimates.