- 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 2012 = 7.7%
Gross household savings have increased from around zero in Q1 2008 to over £20 bn at the end of 2012.
Savings Ratio since 1992
In the post war period, the UK savings ratio was on an upward trend. However, between 1992 and 2008, the saving ratio fell to an all time low of 2.0%.
Since the credit crunch and great recession of 2008-12, the saving ratio has risen as consumers became more risk averse and wanted to pay off debts and increase savings. This rise in the saving ratio has contributed to fall / low growth in consumer spending which has hampered economic recovery.
Saving Ratio in 2008-12 Recession
However, the saving ratio in the 2008-12 recession hasn’t risen as much as during the 1990-92 recession. This is because:
- In 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 same luxury of increasing saving.
Saving Ratio v Net Financial Wealth
Reasons for a Fall In Savings Ratio during 1992-2007
- Availability of credit until 2007 encouraged people to take out loans.
- Rising House prices encouraged people to borrow because of their positive wealth effect. Home-owners could re mortgage
- Cultural / social trends encouraging an attitude of borrowing and spending. See: Problem of Personal Debt
- 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 Recession?
- 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.
- 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.
- 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 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
- If the saving ratio rises, government spending needs to take the place of private sector spending and investment. Otherwise the recession will be deeper.
- If the saving ratio rises, the private sector have 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 with over reliance on consumer spending
- Current account deficit, imports greater than exports.
- Build up of personal debt.
- Paying off debt and savings
- Difference between saving and investment
- Paradox of saving – why people save more when they say it is a bad time to save
(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.