Bean speaks and savings levels fall

(Update) A day after Charlie Bean, number two at the Bank of England, controversially suggested savers should live off their capital, new figures show a drop in the level at which households are saving.

Bean told Channel 4 news, ‘savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.'

As if by magic new figures from the Office for National Statistics have revealed that the household saving ratio - the amount of earnings that people choose to save - fell to 3.2% in the latest quarter, down from 5.5%. This followed a period in which the savings ratio had increased after falling to an all-time low just before the credit crunch.

The figures highlight the cleft stick the country is in over savings. On the one hand we need people to save more to reduce reliance on state benefits and pensions. On the other we need consumers to carry on spending to support the economy through a difficult period.

Philip Shaw, chief economist at Investec, said that the figures were 'a good thing in terms of consumers spending in shops because the last thing this economy needs right now is consumers not spending'.

But he added, 'it’s a bad thing for the prospects of future spending as the strength of the household balance sheets aren’t as strong as we thought before.'

Shaw said: ‘We would expect the proposed [spending] cuts to have negative effects. There are difficult times to come and in that respect the way the household balance sheets are today won’t help.’

Jonathan Loynes, chief European economist at Capital Economics, said: 'With incomes set to come under further pressure over the coming quarters as the fiscal squeeze bites, there are clear doubts over whether households can carry on spending like they did in quarter two. Overall, there are still very good reasons to be cautious over the sustainability of the economic recovery.'

The ONS figures confirmed that gross domestic product (GDP, the value of all new goods and services) grew by 1.2% in the second quarter.