Household savings fall as credit crunch bites

British households have been forced to rely on their savings to maintain their standard of living.

The squeeze on incomes as a result of higher inflation and the effects of the credit crunch was confirmed yesterday by the Office for National Statistics, which reported that savings levels are at 50 year lows.

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Although the savings ratio rose in the second quarter to a still-depressed rate of 0.4 per cent, it was an improvement on the 1.1 per cent fall in the level of the nation's savings seen the previous quarter. Paul Dales, economist at Capital Economics, said that the "incredibly low level" of savings showed just how stretched households' finances are. He said: "With real incomes falling, house prices declining and unemployment rising, it can't be long before households start to forego spending for saving to a more significant degree."

Growth for the second quarter was unrevised at zero, but the annual growth rate was revised up marginally from the previous estimate of 1.4 per cent to 1.5 per cent. Real disposable income increased by 1.7 per cent in the period, not quite enough to make up for the 1.9 per cent fall in the first three months of this year.

Despite the dampening of demand in the economy and a fall in the level of sterling against foreign currencies of around 10 per cent in the six months leading up to the end of the period, the UK's current account balance widened from £5.5bn in the period January to March of 2008 to £11.0bn in the second quarter.

The trade in goods deficit narrowed, but a reduction in the surplus on the income account stemming from falling investment income increased the overall deficit.

One piece of good news for the Government came with the announcement of a once and for all shift in the general level of GDP of 1.5 per cent. This positive adjustment reflects a reclassification of the way bank interest is treated in the national accounts, and the boost to national income will give ministers a little more headroom as they grapple with soaring levels of public borrowing.