Are consumers’ finances healthy as Brexit begins?

Last week’s historic triggering of Article 50 of the Lisbon Treaty marks the beginning of a lengthy and complex process of leaving the EU. The extent to which this event has a near-term impact on the economy, though, will depend on how it affects sentiment and in particular, household spending. At first glance, Q4’s Quarterly National Accounts suggested that households’ financial position was not especially strong at the end of 2016. But there are some good reasons not to be too concerned. Friday’s Quarterly National Accounts confirmed that household spending held up well in the second half of 2016, despite the vote to leave the EU and a slowdown in household disposable income growth. But the fact that the household saving ratio has fallen from 5.9% of disposable income in Q2 to 3.3% in Q4 – the lowest rate since records began in 1963 – could suggest that the current rate of spending growth is unsustainable. This would mean that spending growth will drop sharply in the coming quarters as higher inflation eats into real income growth and if consumers become concerned about the potential impact of Brexit.