Interest Rates and Low Savings Hampering UK Economic Growth

The following article was written by Luis Aureliano, a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.

The UK is currently battling dual demons in the form of rising inflation and declining real wages. This reality has been brought about after the difficult Brexit process, and a disappointing election victory for Prime Minister Theresa May. For close to a year after the Brexit decision, Britain appeared able to withstand the economic difficulties of a Brexit. However, the time lag has caught up with the UK economy, and the pressures are mounting. For months after the June 23, 2016 Brexit referendum, consumer sentiment (buying behaviour) kept the UK economy ticking over.

But now, the tables have turned. UK households are in a bind, with personal disposable income levels being squeezed from every side, as rising inflation and falling real money wages become a reality. In fact, this is the worst cutback in UK spending activity since the 1970s. This also marks the third successive quarter of real income declines in the UK, and the first time in 40 years that this has taken place.

UK savings figures are also on the decline, and now exist at the lowest level in the history of the UK at just 1.7% of disposable income. Consider that the savings rate (percentage of savings from total income) averaged approximately 10% over the past 5 decades, and in 2014 the figure was 6.1% of disposable income.

This is a worrying trend for the United Kingdom, and it is attracting attention from the Bank of England (BOE), and the UK government. According to the ONS (Office for National Statistics), the UK’s strong economic performance and positive consumer sentiment came to a grinding halt during Q1 2017. All the hoopla that followed the strong performance of the UK economy post-Brexit has now evaporated.

UK savings percentage of PDI at multi-decade low

UK borrowing has increased sharply since May, with £300 million more by way of car financing, credit card loans and even personal loans. The total household credit figure increased to £1.7 billion for the month, while consumer confidence retreated sharply. Weakness is evident across the board, with real estate transactions tapering off, and declines in retail and automobile sales taking place.

GDP (gross domestic product) increased at a minimal rate of just 0.2%, confirming fears that the UK could be heading towards a recession. Even the BOE has issued statements to the effect that rising levels of consumer debt are worrisome. Over the past 50 years, the percentage of money available to save from total disposable income peaked in the mid-1990s at just over 15%, but is currently at its lowest level on record. UK consumers have been applying for credit lines in increasing numbers since the Brexit referendum. The cheap availability of credit, and tightening real money wages has meant that consumers are relying more on credit spending.

UK General Election Results Hampering Growth Prospects

The UK general election on June 8, 2017 resulted in a shock outcome for incumbent Prime Minister Theresa May. A hung parliament was hardly the result she expected, and this has reduced confidence in the government’s ability to lead during Brexit negotiations. Business confidence has been impacted, and consumer confidence is also declining. Real incomes in the UK dropped by 1.4% during Q1 2017, more than 4 times more than Q3 2016 and almost as much for Q4 2016. The GBP has also been fighting headwinds against other currencies, and is now trading beneath the critical 1.30 level to the greenback.

USD strength has prevailed in recent days, and this is helping to drive gold prices lower. Traders are reacting by flocking to equities markets across the board. A weak GBP is synonymous with rising levels on the FTSE 100 index. The Bank of England is caught in an untenable situation: if it raises interest rates, it will increase the burden on consumers who are heavily reliant on credit lines. But if it does nothing, runaway inflation and falling real incomes could erode confidence in the UK economy altogether.

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