A nasty squeeze on household incomes will not greatly hurt economic growth this year, economists believe. Although the Office for Budget Responsibility (OBR) foresees real household disposable incomes falling 1.5 per cent this year, it also expects real gross domestic product growth of 3.8 per cent; private sector forecasts are similar.
A big reason for this optimism is that they expect household savings to fall. The OBR forecasts that by 2023 the savings ratio will be just 3.1 per cent, its lowest level since 1951; this means we’ll be spending £96.90 of every £100 post-tax income we get.
The main reason to expect this to happen is simply that it is normal for us to smooth out our spending, with the result that our savings fall when our income does. We borrow or run down our savings to see ourselves through bad times.