Rainy day savings on the rise as fears grow over jobs

MORE people are setting aside rainy day funds as pessimism grows over the outlook for the UK economy, a benchmark report has revealed.

Rising fears over job security triggered a dramatic new fall in consumer confidence in the first three months of 2011, according to research published by the British Retail Consortium (BRC) yesterday.

UK consumers are particularly worried about their job prospects, with the economic outlook and rising fuel prices adding to the downbeat mood, the latest BRC survey shows.

The uncertainty over jobs and the general economic outlook has prompted a surge in savings levels, even with interest rates still at a record low. More than a third of people are diverting their spare cash into savings and are putting money aside where possible.

However a record three in ten UK consumers surveyed by the BRC said they had no spare cash to put aside following a series of blows to household finances in recent months. More than a fifth cite rising fuel prices as their first or second biggest concern, while 85 per cent believe the UK remains mired in recession, up from 82 per cent at the end of 2010.

Stephen Robertson, director of the BRC, said: "Nearly a third of people now say they have no spare money because households are suffering a squeeze between high inflation and low wage growth. In real terms, disposable incomes have fallen for the first time in 30 years.

"With inflation expected to rise further and average earnings showing only minimal growth, disposable incomes will be under continuing pressure for the rest of the year and beyond. The prospect of interest rates beginning to rise as the housing market weakens can only dent consumer confidence further over the coming months."

The continuing decline in confidence in the UK economy is in contrast with growing optimism elsewhere, with 18 of the 51 countries taking part in the Nielsen Global Consumer Confidence survey recording a rise in confidence in the first quarter of the year.

Chris Morley, group managing director of Nielsen UK & Ireland, said: "The long hard winter and continuous media coverage of UK debt levels and cuts in the public sector are all taking their toll on consumer confidence in the UK. I would envisage a continuation of lower confidence as consumers are still being very cautious in their spending intentions."

Further evidence underlining the crisis in household finances came in figures released by the City regulator yesterday showing a sharp rise in the number of people switching from repayment to interest-only mortgages since the credit crunch started.Switching to an interest-only deal can help ease short-term cash flow problems, but there are concerns that many borrowers have no repayment plan in place.

The Financial Services Authority (FSA) wants a clampdown on interest-only mortgages to ensure borrowers have a way of repaying the capital at the end of the loan. But according to the FSA's own figures, the number of borrowers on interest-only mortgages soared by 369,370 between the third quarter of 2007 and the end of 2010, with the value of those mortgages up by 99 billion.