Households raid savings as incomes are squeezed

Weak consumer spending is preventing the economy from staging a sustained recovery, data released by the Office for National Statistics suggested yesterday.

Leaving its last estimate of growth in the first quarter at 0.5 per cent, the ONS confirmed the picture of an economy that has flatlined for many months, having contracted by 0.5 per cent in the last three months of 2010. Taking the effects of the snows last year out, it seems likely the economy may even have gone into reverse. The ONS revised down its estimate for growth in the year to the end of March, to 1.6 per cent from 1.8 per cent, reflecting revisions to 2010 figures.

The ONS said that households' disposable income fell for a second consecutive quarter, forcing consumers to eat into their savings to maintain their lifestyles. Tax hikes, inflation and minimal pay rises have put an unprecedented squeeze on living standards. Sir Mervyn King said yesterday that "it is not easy to do much about that" and that households faced "an uncomfortable period ahead".

Real household disposable income, reported the statisticians, fell 0.8 per cent quarter-on-quarter and by 2.7 over the past 12 months, one of the biggest cuts since the Second World War. The savings ratio fell to 4.6 per cent from 5.1 per cent.

The fragility of household sentiment was echoed in the latest news on house prices. The Land Registry reported that residential real estate in England and Wales fell by 0.4 per cent month-on-month and 2.2 per cent on the year in May, the seventh monthly drop in nine months

The shadow Chancellor, Ed Balls, said: "We will need to see growth of 0.8 per cent in the second quarter of this year simply to get back on track to the Office for Budget Responsibility's recent three times downgraded forecast of 1.7 per cent growth this year – let alone to see growth of 2.6 per cent this year, which was forecast before George Osborne's first Budget."

Howard Archer, the chief economist at IHS Global Insight, added: "We expect GDP growth to be limited to 0.3 to 0.4 per cent per quarter over the rest of 2011, thereby limiting growth to 1.3 per cent in 2011.

"Growth is seen improving modestly to 2 per cent in 2012. These GDP growth forecasts suggest that the Chancellor is highly likely to undershoot on his target of reducing borrowing to £122bn in fiscal 2011/12 from an upwardly revised 2010/11 out-turn of £143.2bn."

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