Fears for Britain's recovery as personal savings dive

A sudden plunge in savings between April and June stoked worries over the weak state of household finances and the UK's recovery prospects today.

The share of income which has been put aside by households fell to 3.2% during the second quarter, the lowest since 2008 and a big drop on the 5.5% registered in the first three months of the year, according to the Office for National Statistics.

Households plundered their savings to fund a 0.7% rise in spending, even though average disposable incomes fell 1.6% during the period, the ONS said.

The figure may please Bank of England deputy Governor Charles Bean — who yesterday said he wanted to see consumers spending more rather than saving to help the economy — but it prompted warnings from experts that the pressure on flagging household finances was likely to intensify amid public sector pay freezes, deficit-tackling measures such as January's VAT hike to 20%, sluggish wage growth and rising unemployment.

Ernst & Young ITEM Club senior economic advisor Andrew Goodwin warned: "We always expected households to dip into their savings, but it is very concerning that they are doing it this early.

"It is going to be a very difficult time for households over the next two years and we can't expect them to drive the recovery like they did in the 1990s."

The prospects for household spending will be crucial in the UK's fightback from recession because it accounts for almost two thirds of UK output.

Goodwin added: "If you have that big a part of the economy growing very slowly, you will need the other parts to grow that much more quickly."

Capital Economics economist Jonathan Loynes said: "There are clear doubts over whether households can carry on spending like they did in the second quarter.

"Overall, there are still very good reasons to be cautious over the sustainability of the economic recovery."

The CBI's latest retail sales survey had better news after a third year-on-year sales rise in a row for the High Street during September, helped by new autumn clothing ranges.

But economic advisor Ian McCafferty added that consumer spending "is likely to be fairly restrained" in 2011 due to weak pay prospects.

The ONS also confirmed that the UK's economy grew by 1.2% during the quarter, the fastest pace in nine years, and revised upwards first-quarter growth to 0.4%.

Construction output was shifted upwards again to a record-breaking 9.5%, the quickest advance since 1963 after a snowbound first quarter, the ONS added.

But IHS Global Insight's Howard Archer said the pace of growth was "clearly unsustainable in the face of major headwinds".