Savings ratio UK

  • Definition of Household savings ratio: The percentage of disposable income that is saved. (1)
  • Total savings = Disposable income – Household consumption

UK Saving Ratio

Latest UK household savings ratio: Q3 2016 = 5.6% (Feb 2017)

The Bank of England have forecast a fall in the savings ratio during 2017 because of the effects of depreciation in the Sterling pushing up prices. If the forecast is correct it could push the savings ratio down to levels not seen since 2008 – just before the  pre financial crisis.

saving-rate

UK Saving ratio. Source: National income accounts Q4 NRJS dataset

NRJS = Households + NPISH (Non Profit Institutions Serving Households)

Saving ratio and base interest rates

saving-rate-interest-rate

In theory, lower interest rates reduce the incentive to save. But, the interest rate is only one of many factors influencing decisions to save. The most important factor is the state of the economy. In 2009, we saw a rapid rise in the saving rate because of the recession – despite interest rates cut to zero.

Gross savings

gross-savings

Source: RPQL, ONS

 

This shows total quarterly gross household + non profit savings.

Gross annual savings

  • In 2007, gross household and non-profit savings were £73,918m
  • In 2010, this rose to £131,713m
  • In 2014, this fell to £60,100m.

Savings ratio since 1963

saving-rate-uk

In the post war period, the UK savings ratio was on an upward trend. Between 1964 and the early 1980s, we see a long-term rise. There was a peak in the recession of 1980/81.

However, between 1992 and 2008 (in a period known as the great moderation), the saving ratio fell to an all time low of 4.6%.

At the start of the credit crunch and recession of 2008-10, the saving ratio rose rapidly as consumers became more risk averse and wanted to pay off debts and increase savings. This rise in the saving ratio contributed to a fall in consumer spending and negative economic growth.

economic-growth-quarterly

The sharp fall in real GDP in 2008/09 mirrored the sharp rise in the savings ratio.

The concern is that economic growth post-2012 is partly driven by a falling saving ratio, that is unsustainable without a rise in real wages.

Saving ratio in 2008-12 recession

The saving ratio in the 2008-12 recession didn’t rise as much as during the 1990-92 recession. This is because:

  • In the 1991-92 recession, interest rates were much higher (reaching a peak of 15%). Since 2009, interest rates have fallen to 0.5%. Therefore, from the perspective of interest rates there is a lower incentive to save in 2012
  • The 2008-12 recession has caused a bigger long term squeeze on real incomes (due to higher tax, rising energy prices and falling real wages). Therefore, people have had less room to increase savings and pay off debt. They have been struggling to meet bills and so they don’t have the same luxury of increasing saving.

Fall in savings ratio since 2010

Since 2010 Q1, the savings ratio has fallen significantly from 11.8% to 4.7% Q2 2015. This is partly due to stagnant real wages, though there are hopes that the recent rise in real incomes will translate into higher savings ratio.

Saving ratio v net financial wealth

saving-household-wealth

Reasons for a fall in savings ratio during 1992-2007

  1. Availability of credit until 2007 encouraged people to take out loans.
  2. Rising House prices encouraged people to borrow because of their positive wealth effect. Home-owners could re-mortgage
  3. Cultural / social trends encouraging an attitude of borrowing and spending. See: Problem of Personal Debt
  4. Low-Interest rates. E.g. in 1991-92 interest rates were over 12%. In 2000s interest rates fell to 3%. Interest rates are currently 4.5% and less than inflation. This negative real interest rate discourages saving.

Note: There was also a fall in the savings rate in the Lawson boom of the 1980s

Why do saving ratios tend to rise in a recession?

  1. In a recession, people worry about unemployment and so are likely to be more cautious about borrowing and spending. If you fear unemployment, you don’t want to be saddled with debt repayments on a new car. People tend to delay big purchases during economic uncertainty. Saving ratios rose during a recession such as 1991-92 and 2008-12.
  2. Banks are trying to improve their balance sheets by attracting more deposits and lending less. It is often hard to get a loan during a recession.
  3. During 2008-12 real interest rates were often negative which, in theory, reduces the incentive to save. However, low real interest rates can be outweighed by more important factors, such as the fear of being made unemployed. In other words, people are saving more – despite poor return from saving.

Saving ratio and the paradox of thrift

The paradox of thrift is the idea that if everyone saves at once, it can cause macro-economic problems (i.e. recession). From an individual perspective, it makes sense to save and pay off debts in a recession. But, if everyone pursues the same course of higher saving, it causes a fall in aggregate demand.

See: Paradox of thrift

Savings ratio and fiscal policy

In a recession, a sharp rise in the savings ratio means that consumer spending will fall significantly. In Keynesian economics, this is a reason for the government to borrow and increase spending. The logic is

  1. If the saving ratio rises, government spending needs to take the place of private sector spending and investment. Otherwise, the recession will be deeper.
  2. If the saving ratio rises, the private sector has more available funds to purchase government bonds.

Benefits of a higher saving ratio

A rapid rise in the savings ratio can cause a fall in aggregate demand and recession. However, in the long term, a higher savings ratio is often considered to help promote more sustainable economic growth.

Higher savings enables more private sector investment. Many see this level of investment as a key factor in determining the long term economic growth rate.

Problems of low savings ratio

A very low savings ratio can indicate:

  • Unbalanced economy witover-reliancece on consumer spending
  • Build up of personal debt.
  • Current account deficit, (with imports greater than exports.)

UK-current-account-from-2001

Since 2010, the fall in the savings ratio has occurred during a widening of the current account deficit.

Related pages

Notes:

(1)  The ONS define the savings ratio (NRJS) – Households’ saving as a percentage of total available households’ resources.

(2) The saving ratio is subject to be revised at a later date.

21 thoughts on “Savings ratio UK

  1. It’s pretty obvious that savings rates are being held artificially low. House prices are far too high relative to income and are being propped up with govt subsidies both in rental and purchase terms.
    The “working poor” are fed up paying taxes to subsidise those who know the system and work less than 16 hours to get enough in benefits to afford themselves a better life than those who work over 35 hours.
    it is also difficult for those on 16 hrs to transfer from the easy life to working full time – because they will be worse off due of the loss of subsidies.
    The gravy train has pulled into the station and the govt is blatantly robbing the old of their hard earned pensions. This is not the solution to encourage people to work hard or save money into a pension – those who don’t will be just as well off as those who do, so why bother?
    Socialism has gone too far and is now penalising those who work.

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