UK households experienced a significant decline in living standards during the first quarter of the year, leading to a record-breaking drawdown of savings and mortgage repayments. According to the Office for National Statistics (ONS), adjusted for inflation, household disposable incomes per head fell by nearly 1%. This marks the fifth time in the past six quarters that living standards have contracted. The only brief improvement occurred at the end of last year when families received direct payments from the government to assist with energy bills. However, the recent rise in inflation, coupled with interest rate hikes, prompted households to pay down their mortgages by a record £5.2 billion. Additionally, savings decreased for the first time since records began in 1987, as individuals shifted their money into higher interest fixed savings accounts.
The UK’s GDP grew by an unrevised 0.1% in the first quarter of the year. This places Britain, alongside Germany, as the only Group of Seven countries that have yet to fully recover from the economic setbacks caused by the pandemic. These figures highlight the extraordinary measures households are resorting to as borrowing costs increase. Ashley Webb, a UK economist at Capital Economics, warned that without government support, real household incomes are unlikely to see significant growth this year. As a result, hopes of avoiding a recession are rapidly diminishing, particularly as lenders raise borrowing costs in anticipation of further rate increases from the Bank of England, which is struggling to control persistently high inflation. This raises concerns for Prime Minister Rishi Sunak, whose Conservative Party currently trails the Labour opposition by double digits in opinion polls, as he may face a general election next year amidst a bleak economic backdrop.
Darren Morgan, the ONS director of economic statistics, confirmed that households withdrew money from their savings accounts at an unprecedented level, while the amount of new mortgage and re-mortgage borrowing declined. These findings are supported by recent Bank of England data, which revealed that households repaid more mortgage debt than they borrowed for the second consecutive month, a phenomenon never before seen. The saving ratio, which represents the proportion of income remaining after spending on goods and services, dropped to 8.7% from 9.3%, partially due to an increase in taxes. Disposable income per head in the first quarter was 1.1% lower compared to the previous year.
The first quarter’s GDP growth was hindered by widespread public-sector strikes over pay and the cost-of-living pressures. Government services, including health and education, contracted, while consumer spending remained stagnant. However, there was positive news regarding business investment, which returned to pre-pandemic levels for the first time, surging by 3.3%. This figure represents a significant upgrade from the previous estimate of a 0.7% increase. The ONS noted that there is anecdotal evidence suggesting that companies rushed to bring forward spending to take advantage of the super deduction, a tax incentive that allowed firms to reduce their tax bills by increasing investment, before it expired.
These developments indicate the growing financial strain on UK households, as living standards continue to decline amidst soaring inflation and rising borrowing costs. With the possibility of a recession looming, Prime Minister Rishi Sunak may face an uphill battle in the upcoming general election, as the country grapples with an uncertain economic future.