The UK's household disposable income has taken a hit, with real incomes falling by 0.8% between January and March this year. This decline is attributed to the rising Consumer Prices Index (CPI) and increased capital gains tax receipts, which have squeezed household finances for the fourth time in five quarters, according to the Office for National Statistics (ONS). Notably, these pressures come despite a broader UK economy that has demonstrated resilience, with initial estimates indicating 0.6% growth in the first quarter of 2026.
The services sector, accounting for nearly half of the UK's economic output, drove this expansion, recording an impressive 0.8% growth. While the construction and production sectors also contributed positively, albeit at a slower pace of 0.2%, the overall Gross Domestic Product (GDP) growth for last year has been revised down from 1.4% to 1.3%. The modest dip in household saving ratio from 9.6% in Q4 2025 to 8.9% in Q1 2026 is also worth noting, as it remains above pre-pandemic levels but continues a steady decline since peaking at 27.5% during the pandemic lockdowns.
Economists are cautiously optimistic about these figures, attributing the broad-based growth across sectors to a more balanced composition of economic momentum. Investment manager Thomas Watts notes that contributions from construction and production indicate a welcome widening of economic growth, which is likely to be reassuring for policymakers at both the Bank of England and Downing Street.
Looking ahead, economists are keeping a close eye on the potential impact of recent energy price increases. Phil Shaw, an economist at Investec, warns that economic growth could slow significantly in Q3 due to these increased costs. However, he also points out that households have some financial buffer to absorb higher costs without a sharp reduction in spending, thanks to their current saving ratio. This may allow the Bank of England to maintain current interest rates rather than increasing them.
With inflation and economic growth prospects firmly on the radar, economists are divided over whether the Bank of England will increase interest rates or hold steady at 3.75%. Shaw forecasts that a rate hike is unlikely this year, with potential cuts only coming into view in 2027. The ONS's latest figures provide valuable insights into household finances and the broader UK economy, setting the stage for ongoing economic debates.
Source: Office for National Statistics (ONS)