Lower incomes trigger raid on savings

Economy: Strong spending by consumers helps to offset fall in profits and larger current account deficit

Fresh signs of weakness in the economy emerged as real personal disposable income fell for the second successive quarter. Profits also declined and the financial surplus of industrial and commercial companies fell to its lowest for two years.

However, strong invisible earnings meant that the current account deficit was less than the City had been expecting.

The below-trend growth in the non-oil economy of 0.3 per cent in the third quarter was sustained by consumers dipping into their savings. Consumer spending rose by 0.6 per cent - slightly lower than the initial estimate - even though real personal disposable income fell by 0.2 per cent.

As a result, the savings ratio - expressed as a percentage of total personal disposable income - fell from 9.3 per cent in the second quarter to 8.6 per cent, the lowest for five years. City analysts disagreed over the interpretation of this plunge in savings.

"It would be most surprising to see the ratio stay this low, let alone fall any further, so spending will grow more slowly in 1996 than income," said Simon Briscoe, economist at Nikko Europe.

However, Ian Shepherdson, economist at HSBC Markets, intepreted the decline in the savings ratio "as a sign of a return of confidence". Along with the recent pick-up in mortgage demand, he said it suggested that consumers would sustain the recovery in 1996.

Spending was strongest on services, up by 0.8 per cent, as consumers splashed out on mobile phone calls and eating out. Expenditure on durables rose by 0.7 per cent, with a decline in purchases of cars offset by strong growth in outlays on household durables such as furniture, computers and white goods. Spending on non-durable goods rose only 0.4 per cent.

The need for strong consumer spending to sustain the economic recovery was underlined by a fall of 1.1 per cent in gross fixed capital formation. Although this was an improvement on the initial estimate of a 2.2 per cent decline, it left fixed investment just 1.6 per cent higher on the third quarter of 1994.

The outlook for higher investment took a knock as gross trading profits fell 1.8 per cent. While this was mainly in the North Sea sector, non- oil industrial and commercial companies also showed a small decline in profits, net of stock appreciation, of 0.2 per cent.

This brought the annual rate of profit growth down from 9 per cent in the second quarter to 5.6 per cent. By contrast, profits of non-oil industrial and commercial non-oil companies rose in 1994 by 14 per cent.

Kevin Darlington, economist at Hoare Govett, said: "The combination of economic slowdown, the now fading non-oil commodity price shock and margin pressure has wrought a marked slowdown in profits growth."

Despite cutting back on fixed investment, the financial surplus of industrial and commercial companies fell from pounds 2.9bn in the second quarter to pounds 2.5bn, its lowest for two years. However, according to Mr Shepherdson, "companies still have very strong balance-sheets."

City economists gave a favourable reception to the latest figures on the balance of payments. "They show that the overseas account will not act as a constraint on policy nor as a thorn in the side of the authorities," Mr Briscoe said.

The deficit on the current account worsened marginally to pounds 1.3bn. However, this was pounds 600m better than the City had been expecting. In addition, there was a sharp downward revision to the second quarter from the initial estimate of pounds 2.4bn to pounds 1.2bn. The improvement occurred mainly because of upward revisions to income from services, up by pounds 640m. Investment income increased by pounds 460m.

Invisible earnings showed a surplus of pounds 2.0bn in the third quarter, much the same as in the previous three months. The surplus on investment income rose by pounds 100m to pounds 2.1bn, while the surplus on trade in services fell from pounds 1.7bn to pounds 1.6bn.

Overseas direct investment into the UK was pounds 4.3bn in the third quarter, taking overall inflow in the first nine months of the year to pounds 11.2bn, almost double the total for 1994. The largest inward acquisitions were the purchases of Kleinwort Benson by Dresdner Bank and Warburg's investment banking operations by SBC.

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