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UK household disposable income fell at its fastest rate since 2023 in the first quarter while the proportion that people save declined for the first time in two years, potentially knocking one of Labour’s key economic targets off course.
The Office for National Statistics confirmed on Monday that the UK economy grew at a brisk rate of 0.7 per cent in the first quarter, the fastest since the same period in 2024.
However, the detailed figures showed that rising wages were offset by a rise in taxes and a jump in inflation.
Real household disposable income per head — the inflation-adjusted amount of income available for a household after taxes and subsidies — decreased by 1 per cent in the first quarter from a 1.8 per cent expansion in the previous three months, marking the fastest decline since the first quarter of 2023.
Last year, Prime Minister Sir Keir Starmer said the government would target household disposable income as a “milestone” for rating the success of his economic policies.
Matt Swannell, chief economic adviser to the EY ITEM Club, said that with earnings growth slowing and inflation set to rise, growth in real income “looks set to slow across the rest of this year”.
However, he noted that with households saving a little less, “there is space for consumption to be cushioned from this slowdown”.
The proportion of disposable income that households save, the household saving ratio, decreased to 10.9 per cent in the first three months, down from 12 per cent in the previous three-month period, marking the first decline in two years.
Liz McKeown, ONS director of economic statistics, said: “The saving ratio fell for the first time in two years this quarter, as rising costs for items such as fuel, rent and restaurant meals contributed to higher spending.”
She pointed out that the ratio remains “relatively strong”, as it compares with an average of 5.5 per cent in the three years to 2019.
Sandra Horsfield, economist at Investec, said: “There would seem to be scope for further declines in future as lower interest rates, over time, encourage households to save less. This can act as a support to economic activity.”
The composition of growth in the UK has left the economy “looking a bit healthier”, according to Ruth Gregory, deputy chief economist at consultancy Capital Economics, as the expansion was less dependent on business investment and net trade, and more on household consumption.
Nevertheless, growth in the first three months was propelled by business activity being brought forward ahead of US tariffs, and by a one-off leap in spending on aircraft. “These sources of growth won’t be sustained,” Gregory said.
Separate monthly figures published earlier in June showed that the economy contracted by 0.3 per cent between March and April. Economists polled by Reuters forecast economic growth to slow to only 0.1 per cent in the second quarter.
Weakening real income growth, tightened fiscal policy, high global trade market volatility weigh on the UK economic outlook, said Swannell.
“After the strong start to 2025, the UK looks set for another year of weak growth, with headwinds continuing to intensify,” he said.
Separate data published on Monday by the Bank of England showed that in May, net borrowing of consumer credit by individuals decreased to £859mn, from £1.9bn in the previous month, the lowest level since April 2024.
For some economists, this suggests that May’s 2.7 per cent fall in retail sales was not offset by stronger non-retail spending, adding to signs of dulled economic momentum in the second quarter.
The Bank of England’s data also showed, however, that mortgage approvals for house purchases in May increased by 2,400 to 63,000, the first rise since December 2024.
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