- 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: Q1 2017 = 1.7% (July 2017)
- By contrast the average savings ratio in the past 54 years is 9.2% of disposable income.
2017 has seen a dramatic fall in the UK savings ratio to a record low. This fall in the savings ratio has been caused by
- Fall in real wages
- Depreciation in Sterling post-Brexit – pushing up cost of living and contributing to fall in real wages
- To maintain spending, consumers have borrowed and dipped into savings
- Temporary factors (high tax payments on dividends)
UK Saving ratio. Source: National income accounts Q4 NRJS dataset
NRJS = Households + NPISH (Non Profit Institutions Serving Households)
Saving ratio and base interest rates
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.
Source: RPQL, ONS
This shows total quarterly gross household + non profit savings.
2017 saw sharp drop in saving levels
Savings ratio since 1963
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.
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
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 a 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 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
- 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 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 with over-reliance on consumer spending.
- Build up of personal debt.
- Current account deficit, (with imports greater than exports.)
Since 2010, the fall in the savings ratio has occurred during a widening of the current account deficit.
- 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
- Definition of disposable income
(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.