The bulk of the leap in the saving rate will be reversed as the economy opens and people start spending again but the desire to hold more savings post-lockdown combined with lower incomes will weigh on consumption over the next few years, prolonging the recovery.
- The bulk of the leap in the saving rate will be reversed as the economy opens and people start spending again but the desire to hold more savings post-lockdown combined with lower incomes will weigh on consumption over the next few years, prolonging the recovery.
- The household saving rate has soared, perhaps from about 5% of disposable income at the end of 2019 to as high as 30%. (See Chart 1.) We won’t get data on just how far the saving rate has risen until the end of September. But we can already see the surge in cash in bank deposits, which grew by £30bn in March and April combined, equivalent to about six months of normal savings. (See Chart 2.) This would normally be a sign that some households should be in a good position to spend once the economy opens.
- However, this aggregate picture masks a huge difference between households. One group of households contains people who have lost jobs or taken big pay cuts and are having to run down savings or even borrow more. Households in this group are typically low paid and can’t work from home. The second group are better paid and more able to work from home and so have seen much smaller reductions in incomes if any. This group is “involuntary” saving because the lockdown has limited their ability to spend.
- As the lockdown ends, households in the second group will increase their spending, which will cause the saving rate to fall back down. So the biggest issue isn’t will the saving rate fall, but how quickly and how far will it fall. Admittedly, the first group will have no choice but to continue to spend all their incomes and the second group may decide to spend some of their spare cash. There is some evidence from China of an uptick in spending on high-value goods, such as cars, once the lockdown had ended.
- But the second group of wealthier households has a relatively low marginal propensity to spend and are more inclined to save. Indeed, in March and April combined, households paid back £11.2bn of consumer credit, equivalent to about 5% of total outstanding consumer credit. This desire to pay down debt may limit the extent of any spending spree.
- What’s more, we suspect that both groups will want to have a higher level of saving in the future to protect against a less secure jobs market and the risk of future lockdowns. After the Global Financial Crisis (GFC), the saving rate rose from about 8% to 12% and remained elevated until 2013, five years after it initially rose. We think it will be similar this time with the saving rate settling around 10%, up from 5% pre-crisis.
- So we think that households will be less willing to spend in the future and will want to save a higher proportion of their incomes. At the same time, income will be lower as the unemployment rate is likely to remain elevated for a long time. At the end of 2020 it may be 5.0%, up from 3.8% at the end of 2019. And many of those who keep their jobs will face lower pay. As such, real household disposable incomes (RHDI) may fall by 5% this year, which will impact households ability to spend even if they wanted to.
- Household spending will still rebound from its anaemic level in the last few months. But higher saving rate means that the initially strong rebound will peter out. Indeed, household spending probably won’t reach its pre-crisis level until 2023. All this suggests that there is likely to be a permanent step up in the level of bank deposits that households hold.
Chart 1: Saving Rate (% of disposable income)
Chart 2: Household Money Holdings (£bn, m/m change)
Sources: Refinitiv, Capital Economics
Thomas Pugh, UK Economist, +44 7568 378 042, firstname.lastname@example.org