With today being the end of another quarter the Office for National Statistics (ONS) has released a swathe of 2017 Q1 data on UK economic trends, accounts and flows. Expectedly it makes for a fairly disappointing read. Even factoring for the effects of Brexit uncertainty, the reports suggest a number of economic headwinds that could lead to a further blow to market confidence.
First, the current account deficit was £16.9 billion widening £4.8 billion from the previous quarter. This was ‘due predominantly to a widening in the deficit on trade’ both from ‘a widening in the deficit on trade in goods and a narrowing in the surplus on trade in services.’ This is not what the government was hoping for in the wake of Brexit proceedings and a weaker pound. According to the ONS this poor trade performance reduced GDP growth by 0.8 percentage points.
Second, the UK household savings ratio dropped to just 1.7%, its lowest in 54 years: that is since the series began in 1963. This is often seen as a positive as theoretically it could be the result of a general confidence in the future - as people spend more now expecting future income to meet future needs. In this instance however, it seems more likely due to growing constraints on the ability to save. Not only is this the lowest recorded level but also one of the sharpest quarterly drops recorded (down from 3.3% in the previous quarter and from 6.1% in the first quarter of 2016).
The series is however prone to sizable revisions and anyone not concerned with this latest reading is almost certainly expecting the figure to be revised substantially upwards. Also a closer look at the breakdown suggests that much of the reduction in saving stems from higher taxation (for a minority) and reduced income from property, neither of which are of major relevance for wider households’ spending decisions. Lower real wages are the other obvious cause of some of the decline in savings; this is of more concern. The ONS confirmed that this is having an effect on spending and saving alike with household spending growth dropping to 0.4% (from 0.7% in Q4 2016). In aggregate this meant that growth from the quarter was just 0.2% (down from 0.2% in the previous quarter).
Although the UK economy has remained relatively buoyant since the Brexit process began such a low savings ratio compared to the 9% historical average calls into question the sustainability of economic growth and would likely make any shock or recession more painful. Economic growth could be doubly hit in the UK if we see spending adjust downwards both to compensate for lower real wages and to save more as current optimism declines.