June 29, 2007 / 9:10 AM / 13 years ago

Economy grows as saving rate at 47-yr low

LONDON (Reuters) - The economy grew briskly in the first quarter of 2007 but consumers’ spending money fell again, squeezing savings to the smallest bite of their income in nearly half a century.

Shoppers throng on Oxford Street in this December 26, 2006 file photo. The economy continued to grow strongly in the first quarter of 2007, official figures confirmed on Friday, but the saving ratio dropped to its lowest level in nearly half a century. REUTERS/Luke MacGregor

Economists said that may prompt weaker spending later this year but for now another quarter-point interest rate hike looked likely as soon as next week, especially as other data showed home loan approvals unexpectedly rose in May.

The Bank of England has raised interest rates four times in the last year by a total of a full percentage point but the economy still grew a healthy 0.7 percent in Q1, leaving output 3 percent up on the year, official figures showed on Friday.

The rate rises, however, are eating into people’s spending power, more so because they come on top of huge rises in household bills and local taxes. The Office for National Statistics said disposable income fell 0.3 percent in Q1.

Despite having less cash, Britons, already in debt to the tune of more than a trillion pounds, increased their spending by 0.5 percent, as they continued to run down their savings.

The savings ratio fell to just 2.1 percent, its lowest level since the start of 1960 when Harold Macmillan was prime minister and the economy expanded by a roaring 5.3 percent.

“Weak disposable income and rising rates are a bad combination for consumption and growth later in the second half of the year,” said George Buckley, chief UK economist at Deutsche Bank.

A survey by pollsters GfK/NOP also out on Friday showed consumer confidence slipping slightly in June as consumers were forced to shell out more in borrowing costs.

HOUSING STRENGTH

Separately, the Bank released data showing mortgage approvals — loans agreed but not yet made and a harbinger of future house price growth — bucked a falling trend in May despite higher interest rates and expectations of yet higher borrowing costs to come.

Experts say that is sure to worry Bank policymakers who are worried that house prices are still rising too fast despite the monetary tightening.

The Bank’s Monetary Policy Committee was split 5-4 in its decision to hold interest rates at 5.5 percent this month with Governor Mervyn King and three others wanting an immediate quarter-point rate rise.

A Reuters poll this week showed 56 out of 70 economists were betting that at least one member will change sides to the rate rise camp next week.

Deputy Governor Rachel Lomax, however, gave little indication in parliamentary testimony on Thursday that she was ready to change her view. She said she saw no reason to rush and worried about overdoing the tightening.

She and others are worried that raising rates too fast could cause too much pain for people who already have a huge amount of debt and this could be exaggerated after the expiry of fixed rate mortgages taken out by hundreds of thousands of people two years ago when expectations of further rate cuts were rife.

The Bank figures also showed that consumers added 9.544 billion pounds of debt in May alone, taking the total to 1.334 trillion pounds.

additional reporting by Fiona Shaikh, Matt Falloon and Christina Fincher

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