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UK households bolstered their savings in the second quarter according to new data that suggests consumer caution amid an uncertain economic outlook.

The percentage of disposable income saved by households increased by 0.2 percentage points to 10.7 per cent in the three months leading up to June, as reported by the Office for National Statistics on Tuesday. This household savings ratio remains significantly higher than the 5.6 per cent average observed in the three years preceding the pandemic.

The ONS said the rise in disposable incomes was largely driven by increased wages and reductions in taxes on income and wealth.

The statistics agency also verified that the economy expanded by 0.3 per cent in the second quarter, indicating a deceleration from the 0.7 per cent growth in the previous three-month period. Output within consumer-focused sectors such as bars and restaurants declined by 0.1 per cent during the quarter, even though services overall experienced an unchanged increase of 0.4 per cent.

“Households remain reluctant to dip into their savings,” said Martin Beck, chief economist at WPI Strategy.  

A resurgence in consumer spending, capitalizing on saved reserves, could potentially foster growth given a boost in confidence, Beck noted. However, “concerns about November’s Budget and the risk of significant tax increases could dampen sentiment . . . turning a potentially beneficial cycle into a detrimental one”.

Several UK retailers have sounded the alarm on consumer sentiment ahead of the Budget.

John Lewis chair Jason Tarry said “there’s no doubt consumer confidence is subdued”, while JD Sports pointed to “strained” household finances.

Leading high street retailer Next, on the other hand, has cautioned that it anticipates a slowdown in sales growth in the upcoming months, citing that the “medium to long-term outlook for the UK economy does not appear promising”. Additionally, online fast-fashion company Asos indicated that weaker demand would result in annual revenue falling below expectations.

Recent quarter growth was predominantly fueled by government spending, while household consumption increased by 0.1 per cent, despite a more rapid rise in household disposable incomes.

At the Labour conference on Monday, chancellor Rachel Reeves said the UK economy was strong but warned that tough choices lay ahead in

her November 26 Budget, paving the way for new tax rises.

Prime Minister Sir Keir Starmer is projected to use his prominent Labour conference speech on Tuesday to caution his party to prepare for decisions that “are not cost-free or easy”.

Matt Swannell, chief economic adviser to the EY Item Club, said the detailed GDP data “pointed to more weakness than the headline reading suggested, as consumer caution continued to hold back private demand”.

He added that the UK looks set for “sluggish growth” over the coming quarters as real incomes are squeezed and further tax rises in the autumn Budget look “almost inevitable”, adding to the fiscal tightening from the previous Budget.