Savings Ratio UK

• 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.

savings ratio

Reasons for Fall In Savings Ratio

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.
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

What will Happen To savings Ratio as we enter Recession?

1. 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.
2. Also, banks are trying to improve their balance sheets by attracting more deposits and lending less.
3. However, real interest rates are currently negative which does reduce incentive to save.