Real household disposable income per head declined 0.8%, a drop driven by increases in taxes on income and wealth. It means living standards haven’t grown since the end of last year.
The data also confirmed that growth slowed sharply to 0.1% in 3Q after a strong first half of the year. The economy grew 0.2% in the second quarter instead of the 0.3% previously estimated, though the final three months of 2024 were revised slightly higher.
The saving ratio has held at historically high levels, holding back growth in recent years, and Monday’s figures will do little to dispel fears that consumers remain cautious. The ONS said an easing in non-pension savings may be to do with frozen tax thresholds boosting the amount raised from employment and self-employment.
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The figures come just weeks after Chancellor of the Exchequer Rachel Reeves confirmed that personal tax thresholds will be maintained for a further three years, one of the major revenue raisers at her Nov 26 budget.
It was the first time the saving rate has fallen below 10% in over a year with households battening down the hatches after a series of economic shocks and double-digit inflation. That has been a major drag on the economy and has seen British consumers diverge markedly from the behavior of American households.
A revival in household spending is seen as vital for supporting the growth rates pencilled in by the Bank of England (BOE) and Office for Budget Responsibility in the coming years. BOE governor Andrew Bailey conceded last week that an uncertain global outlook is keeping consumers cautious, after the central bank cut interest rates to the lowest since early 2023.
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While Reeves at the budget last month announced £26 billion of tax rises that will be largely borne by households, the hikes are backloaded and she provided relief in the near term on energy bills and rail fares.
That is expected to reduce inflation by as much as half a percentage point next spring. The BOE now expects inflation to be close to its 2% target at that point.
The downgrade to growth in the second quarter means the economy expanded 0.9% in the first half of the year. The UK therefore matched Japan as the fastest-growing economy in that period.
However, growth has slowed since and contracted in September and October amid mounting speculation over tax hikes at the budget.
Lindsay James, investment strategist at Quilter, said the figures confirmed that the economy “is grinding to a halt and showing little sign of achieving what it did in the first half of the year”.
Separate data showed the underlying current account deficit excluding precious metals narrowed to £10.5 billion, or 1.4% of GDP in 3Q, from £15.5 billion in 2Q. The total deficit narrowed sharply, by £9.1 billion to £12.1 billion.
A widening of the deficit in goods and services was more than offset by sharp fall in the primary income deficit, as UK residents saw their income from overseas holdings increase while payments to foreign investors on their UK holdings declined.
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