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Household savings rate drops to record UK low of 3.3% of disposable income as consumers keep on spending

Household saving rates have hit record lows as consumers continue to spend in the face of rising inflation.

The Office for National Statistics said the saving ratio for households dropped from 5.3 per cent to 3.3 per cent of total disposable income in the fourth quarter.

The rate, which includes non-profit institutions serving households and includes the likes of labour unions and charities, was at its lowest level since records began in 1963.

Rate decline: The ONS said the saving ratio for households dropped from 5.3 per cent to 3.3 per cent of total disposable income in the fourth quarter

That figure measures the amount being put away for saving as a proportion of disposable income.

Savings rates are currently under one per cent for easy-access and no cash Isa seasons.

It came amid a 0.7 per cent rise in household spending in the fourth quarter, helping fuel a 0.7 per cent rise in GDP growth over the same period.

Consumers have managed to keep up spending despite a 0.4 per cent drop in real disposable incomes, which have been knocked by rising inflation following the post-Brexit vote collapse of the pound.

It has left households with less cash for saving.

ONS head of GDP Darren Morgan said: ‘Although household spending rose at the end of last year, there was a noticeable worsening in people’s perception of the general economic situation and their own financial position.’

While Morgan said that the drop in the saving ratio was partly due to factors like the holding of pension funds rather than any ‘significant changes’ in real incomes, experts say it signals more challenging times ahead.

John Hawksworth, chief economist at PwC, said: ‘In short, the UK consumer increasingly appears to be living beyond their means and this cannot continue forever as inflation rises further above target over the course of this year, squeezing real earnings.

‘This reinforces our view that we will see a gradual slowdown in the UK economy this year as consumers pull in their horns, despite some offset from stronger net exports.’

Inflation surged to 2.3 per cent in February, as sterling’s post-Brexit vote collapse made everyday items more expensive.

The ONS also released data outlining Britain’s current account deficit, which measures the amount of money flowing in and out of the economy.

The deficit more than halved from £25.7billion to £12.1bn in the fourth quarter, thanks in part to a rise in the export of goods to £7.6bn, which included £1.6bn worth of oil exports and £1bn in machinery.

Big spenders: Consumers have managed to keep up spending despite a 0.4% drop in real disposable incomes, hit by rising inflation after the post-Brexit vote collapse of the pound

The trade surplus in services also widened by £2.4bn to £26.8bn.

Sterling’s collapse was widely expected to boost exports, as it makes UK goods less expensive abroad.

Annual GDP growth between 2015 and 2016 was confirmed at 1.8 per cent.

Rachael Griffin, financial planning expert at Old Mutual Wealth, said of the Household Savings Ratio fell to its lowest since the early 1960s: ‘These figures should provide a timely wake-up call for those that are thinking of spring cleaning their personal finances at the end of the tax year.

‘While some people may be pleased that household spending is buoyant, for families and individuals it is really important to prioritise financial security over short-term spending.

‘A worrying number of households do not have any sort of cash savings or insurance to protect against financial difficulty if life throws unexpected challenges at them. Building up a cash buffer to cover at least three months of essential spending is a sensible first step.

‘Once this buffer is in place, it is then possible to look further ahead and build a financial plan for the future with long-term investments.

‘Research we’ve have conducted with YouGov shows that today’s working-age households are under-saving compared to older generations and are at risk of experiencing a less prosperous retirement as result.

‘Almost two thirds of 30-45 year olds say they are worried they won’t be able to afford a decent retirement, with just under 80 per cent saying it is because they can’t afford it.

‘This feeling of unaffordability isn’t likely to disappear and if anything could get worse as today’s stats show incomes are going down and spending is going up.’