We’ve assumed households just go back to saving the same share of their income as they did before the crisis. That is enough to drive a rapid economic recovery. The upside risk is if households go further and spend some of their stock of savings. Indeed, if households spent all the money they have saved since the COVID-19 crisis began, this could boost GDP to the tune of 6.5%.
- We’ve assumed households just go back to saving the same share of their income as they did before the crisis. That is enough to drive a rapid economic recovery. The upside risk is if households go further and spend some of their stock of savings. Indeed, if households spent all the money they have saved since the COVID-19 crisis began, this could boost GDP to the tune of 6.5%.
- Data released today showed that while the household saving rate (the cash saved as a share of disposable income) has fallen from a peak of 25.9% in Q2, it remained elevated at 16.1% in Q4. That’s well above its pre-pandemic level of 7.7%. (See Chart 1.) To some extent, the sharp rise has been driven by an increase in precautionary saving – uncertainty has caused households to save more for a rainy day. But the COVID-19 restrictions and government policies have been more important. The government has supported households’ incomes, while lockdowns have prevented people from spending. (See Chart 2.)
- On the face of it, this leaves plenty of scope for households to go on a spending spree once the economy reopens. In fact, if we take the year before the pandemic as the “normal” rate of saving, then the stock of “excess” savings accumulated since the start of the pandemic has reached £140bn or 6.6% of GDP. (See Chart 3.) And that stock of savings is likely to rise even further in 2021. Admittedly, data on household savings are often heavily revised. But alternative data on cash held in bank accounts suggest the stock of savings might have been almost as large, at about £125bn. (See Chart 4.)
- How much savings boost the economy depends on two factors. First, the extent to which households spend from their flow of future income. Second, whether they spend any of the £140bn stock of savings they have built up.
- The first factor depends on the extent to which households return to pre-pandemic norms. If households save a greater share of their income due to lower job security, then the saving rate would stay above pre-pandemic levels, as it did after the Global Financial Crisis (GFC). (See Chart 5.) If so, then it may take four years for the saving rate to fall back to its pre-pandemic level of 7.7%. (See the black line on Chart 6.) That would be consistent with nominal consumption returning to its pre-virus level in Q3 2022 and rising fairly modestly thereafter. (See the black line on Chart 7.)
- But we think that there is potential for the saving rate to fall towards the pre-pandemic level more quickly than it did after the GFC. Back then unemployment stayed high for four years and the housing market remained weak, both of which incentivised saving. This time, we expect unemployment to fall more quickly. (See Chart 5 again.) And we only expect house price inflation to moderate slightly from 3% in 2021 to 2.5% in 2022. If households go back to spending the same share of their income as they did prior to the pandemic, that would cause the saving rate to fall back to pre-crisis levels of about 8% and it would mean that nominal household spending returns to its pre-crisis level in Q4 2021. This is our forecast and is shown by the blue lines on Charts 6 & 7.
- Households could go further and spend some or all of the stock of excess savings that they have built up. Even if households spent just a quarter of their stock of savings (or £35bn), this would still lift household spending by 2.8%, boost GDP by 1.6% and push the saving rate down to 6.0%. If they were to spend all their stock over one year, that would push the saving rate to -1.0% by Q4 2021 and would give an additional fillip to spending of 11.3% and a boost to GDP of 6.6% (the grey lines on Charts 6 & 7).
- However, it seems unlikely that households will spend the cash they have accumulated for three reasons. First, it is households with higher incomes and retirees, who typically spend less from their savings, who saved more last year. (See Chart 8.) They may just sit on their savings and let their money balances remain higher. Second, some households may decide to use savings to pay down debt and/or fund spending that would otherwise have been financed by borrowing. Third, if households spend some of the money, this spending may go on imported goods and services, such as foreign holidays, or housing deposits (which are not classed as consumption) so this would not raise domestic GDP. Note that the Bank of England has assumed that £6bn (or 0.3% of GDP) of the stock of savings is spent over the next three years.
- Overall, by assuming that households do not draw down their stocks of savings, we have made a fairly cautious assumption in our forecast. That still gives us quite a strong recovery in consumption. But the possibility that people actually go out and spend their excess savings is a big upside to our forecasts.
Chart 1: Household Saving Rate (As a % of Disposable Income)
Chart 2: Nominal Household Income & Spending (£bn)
Chart 3: “Excess” Household Saving (£bn)
Chart 4: Households Cash Holdings (M4ex., £bn, m/m)
Chart 5: Household Saving Rate & Unemployment Rate
Chart 6: Household Saving Rate (As a % of Disposable Income)
Chart 7: Nominal Consumption (Q4 2019 = 100)
Chart 8: Change in Savings as a Result of the Pandemic (% of Households, Aug./Sep. 2020)
Sources: Refinitiv, Bank of England, Capital Economics
Ruth Gregory, Senior UK Economist, +44 7747 466 451, firstname.lastname@example.org