- Definition of Household savings Ratio: The percentage of disposable income that is saved.
- Total Savings = Disposable Income – Household consumption
In the post war period, the UK savings ratio was on an upward trend. However, in recent years, the saving ratio has fallen to an all time low.
Reasons for Fall In Savings Ratio
- Availability of Credit until 2007 encouraged people to take out loans
- Rising House prices encouraged people to borrow because of their positive wealth effect.
- 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
What will Happen To savings Ratio as we enter Recession?
- In a recession, people worry about unemployment and so are likely to be more cautious about borrowing and spending. Saving ratios often rise during a recession such as 1991-92.
- Also, banks are trying to improve their balance sheets by attracting more deposits and lending less.
- However, real interest rates are currently negative which does reduce incentive to save.
it may well be that the outcome of the current (2011) global crisis unfolds in several phases, the first being loss of net worth, liquid assets, and income. The second being a reconsolidation of thought, in which consumerism is rejected by increasing numbers of individuals, and the third being a nascent period of intelligent money management and a rise in confidence.
The Uk are looking after their money better.
How true. We are indeed becoming more and more careful with the way we deal with our money now that we are facing recession. Hope the better times are just round the corner and hope that the lessons of recession arent forgotten then.
Suzie