UK economic recovery propped up by dwindling savings

7th August 2013

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Concerns over the fragility of the UK’s economic renaissance are rising as the recovery is been driven by UK family savings, which have fallen to their lowest in four years writes Philip Scott.

According to research from national union, the Trades Union Congress, household savings are underpinning the UK’s economic recovery and preventing it from sliding back into recession.

The study reveals how recent fragile signs of recovery have coincided with a 43 per cent collapse in family saving, which is now at its lowest level in four years. The TUC analysis shows that between March 2012 and March 2013 the proportion of income that families put away dropped from £20.1bn to £11.4bn.

But over the same period, consumer spending increased by 4.2 per cent from £253.3bn to £264.0bn, helping the economy to grow by 0.3 per cent. However, had saving rates remained the same during these five quarters, household spending would have been £9bn lower and GDP £5.9bn lower. This in turn would have seen the economy contract by 1.3 per cent and slip back into recession, the analysis reveals.

Just last week, an influential think tank, the National Institute of Economic & Social Research forecast that the UK economy would grow by 1.2 per cent this year and 1.8 per cent in 2014. This is an upgrade of 0.3 per cent on both figures.

But the NIESR warned that households have cut savings with the savings ratio from 6.7 per cent last year to 4.2 per cent this year. It says this should drive consumer spending at the expense of household saving. The think tank warns that growth could collapse next year to 1 per cent if the saving rate increases to just 5.4 per cent.

It appears that UK consumers are hitting the high streets again as UK retailers enjoyed their best July in six years according to trade body the British Retail Consortium. The trade body said the total value of sales was 3.9 per cent better last month than a year ago, nearly double July 2012’s figure and the best July performance since 2006.

The TUC says its findings highlight how fragile the UK’s recovery is and warned that relying upon families to raid their savings was not a sustainable option for ministers.

Instead of boasting about how the economy is on the mend, the Chancellor should be doing more to boost household incomes to secure long-term growth, says the TUC.

TUC general secretary Frances O’Grady says: “This analysis shows that Britain’s fragile recovery is being propped up by families raiding their piggy-banks.While any signs of growth are welcome, it looks like recent news has been driven by running down savings and government propping up the housing market. This is hardly a sustainable route to recovery, and looks too much like a repeat of trends that drove the crash. A sustainable recovery needs to be based on growth, investment and a recovery in living standards. That’s why Britain needs a pay rise.”

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