The consumption-led growth which prompted the government’s economic watchdog to raise its forecasts for the UK economy this year is “unsustainable”, according to a former deputy governor of the Bank of England.
Sir Charlie Bean said households “have been running down savings” to fund consumption. However, “that is not sustainable,” he said in a briefing on the Office for Budget Responsibility’s (OBR) forecasts.
Consumption growth will only be sustainable if real income growth picks up, Bean said.
The strength of consumer spending in the second half of 2016 was partly a “delayed response” to previously low inflation and rising real incomes.
Continued spending has seen the savings ratio – the proportion of incomes that households save – fall “very substantially” to low levels not seen since the early stages of the financial crisis, Bean said.
Consumer spending was a vital pillar in the UK economy's strength at the end of 2016.
However, the OBR judged that consumption growth will slow next year “as real incomes are squeezed by higher inflation”, given the higher sterling prices of imports.
The watchdog’s inflation forecast shows consumer prices growing by 2.4 per cent this year before returning to the Bank of England’s two per cent target in 2019.
Bean, who joined the OBR in January, also justified the watchdog’s lower forecast for inflation, saying it had taken “a more optimistic view on pay growth”.