U.K. Consumers’ Retrenchment Creating Drag on Economic Recovery, BOE Says

British households are cutting back on spending as they prepare for a worsening economic environment that’s threatening jobs and creating a drag on the recovery, the Bank of England said.

Fifty-six percent of households in a survey said income available after tax, insurance, housing costs, loan repayments and bills has fallen over the past year, the bank said in its Quarterly Bulletin in London today. Thirty-one percent reported no change and 13 percent said their income had risen.

The recovery “has been disappointing and there are signs that output growth has slowed in recent months,” Chief Economist Spencer Dale wrote in the bulletin. “An important feature of this recovery relative to past ones -- and a key reason why the pace of the recovery has been disappointing -- is the weakness in household consumption.”

An “important” impact on incomes was the increase in sales tax in January, the bank said. Chancellor of the Exchequer George Osborne is sticking to plans for the tightest fiscal squeeze since World War II as investors punish European nations for failing to manage their debts. Dale said last week the U.K. faces the possibility of contraction as the region’s turmoil worsens.

The impact of the government’s fiscal plans may accelerate, today’s report said. When asked about the impact of the chancellor’s plans in the past year, 48 percent said they were affected against 34 percent who said they weren’t heavily affected. When asked about the future, 69 percent forecast an impact from the cuts, and 15 percent saw no heavy impact. The remainder said they hadn’t thought about it.

NMG Consulting carried out the survey of 1,985 people for the bank from Sept. 23 to Sept. 29

Market Tensions

The bank’s quarterly assessment of financial markets pointed to worsening conditions “amid intensifying concerns about a about a potentially disorderly resolution to the fiscal challenges and external imbalances facing several euro-area countries, related banking sector vulnerabilities and the macroeconomic outlook.”

Bank of England Governor Mervyn King has said there are early signs of a credit crunch in the euro area. The central bank restarted bond purchases in October to aid the economy and introduced a new sterling liquidity measure this month to help banks weather any further escalation of the crisis.

Bank funding markets worsened and longer-term unsecured debt markets were difficult, and market contacts said they “expected the cost of unsecured funding to remain elevated for the foreseeable future,” according to the bulletin.

The central bank said investors sought refuge in assets perceived as safer, such as U.S. and U.K. government bonds. The 10-year gilt yield fell to 2.034 percent on Dec. 16, the least since Bloomberg began compiling the data in 1992. Two-year yields also fell to a record low.

In the bulletin, the Bank of England also said that U.K. lenders using the bank’s Special Liquidity Scheme made 11 billion pounds ($17 billion) of repayments over the quarter, taking the total repaid by the end of November at 179 billion pounds.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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