Brits have run down their savings to record-low levels, just as Brexit starts to bite

As far as warnings signals go, this is a pretty clear one. The UK’s household savings ratio—a straightforward measure of income minus spending—dropped to 1.7% in the first quarter of 2017, the lowest it’s been since at least the early 1960s, when record began, according to the Office for National Statistics.

For the past half a century, the average savings ratio in the UK has been around 9%. But a low savings ratio is not necessarily a bad thing—it can be a sign that people are confident about future earnings and don’t feel the need to set aside money for a rainy day. By the same token, the savings ratio tends to rise during downturns, as households spend less and save more.

But given the shaky state of the UK economy, a record-low savings ratio is probably not sending the positive kind of signal. Revisions to data today confirmed that UK GDP rose by a measly 0.2% in the first quarter of the year, versus the previous quarter. Meanwhile, rising inflation linked to the falling pound, a decline in real wage growth, and higher income taxes are squeezing household budgets. With less money to set aside, consumers are turning to debt instead. Consumer credit rose by more than 10% in the year to April, and the central bank is worried about it.

As the UK prepares to leave the EU, low savings and lots of debt raises the stakes for a successful resolution to the divorce negotiations. On this point, the early signs aren’t good. British households are heading into Brexit with little buffer in case of a bad outcome.

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