The Sahm Rule – predicting recessions

The Sahm rule is a way of predicting a recession from changes in the unemployment rate. “(The) Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.” (Sahm Rule) …

Read more

Price controls – advantages and disadvantages

maximum-price

Readers Question: what are the pros and cons of price control? Summary Price controls can take the form of maximum and minimum prices. Price controls can also be used to limit price increases as a way to try and reduce the rate of inflation. Maximum prices can reduce the price of food to make it …

Read more

Do rising oil prices cause recession?

oil-prices-2022-recession

Periods of high oil prices frequently lead to periods of recession shortly after. There are two main reasons for this. Higher oil prices reduce disposable income leading to lower spending. Higher oil prices push up inflation causing Central Banks to increase interest rates. Oil prices and recession With oil prices rising above $100 because of …

Read more

Net lending and borrowing in UK by sector

sectoral-net-lending

A graph showing net lending (+) and net borrowing (-) by sector in the UK economy. This shows how public borrowing is mirrored by a rise in private sector (household+corporate) saving. The two extremes are the financial crisis of 2009 and Covid lockdowns of 2021. In both cases, these events led to a rise in …

Read more

Why war is becoming more costly

value-world-exports-to-gdp

War has always had substantial economic costs, but war is becoming increasingly costly for both belligerents and bystanders. This is due to both the monetary costs of fighting and the economic fallout of sanctions. During the cold war, there was a theory that nuclear war would ensure a mutual self-destruction – and this assured mutual …

Read more

How inflation affects the stock market

global-inflation-rate-1981-2021

Summary – Periods of high inflation usually lead to lower returns on the stock market because higher inflation is likely to lead to higher interest rates, lower economic growth and lower dividends. Impact of high inflation on share prices If the inflation rate increases, this will make investors wary for a few reasons. Firstly, if …

Read more

Savings ratio UK

saving-ratio-97-2020
  • 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: 2021 = 10% But, by 2021 Q4 the saving ratio had fallen to 6.2%
  • By contrast, the average savings ratio in the past 54 years is 9.2% of disposable income.

Rise in savings during Covid Pandemic

2020/21 saw a spike in the savings ratio due to the unusual circumstances of the Covid Pandemic. With normal economic activity curtailed many households were unable to spend on usual items like holidays, leisure and going out. Therefore, household savings rose sharply. With the end of covid lockdowns, the savings ratio fell. The forecast for savings in 2022 and 2023 is for savings to fall sharply due to the cost of living crisis, with many households seeing a fall in real income. This will cause households to run down savings to meet the rising cost of fuel and energy.

uk-saving-ratio-97-22-markers

UK Saving ratio. Source: National income accounts  NRJS dataset

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

Low saving ratio 2017-2019

This period saw a significant 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 the cost of living and contributing to falling in real wages
  • To maintain spending, consumers have borrowed and dipped into savings
  • Temporary factors (high tax payments on dividends)

Saving ratio and base interest rates

base-rates-saving-rates-97-20

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.

Read more

How inflation affects your cost of living

cpi-inflation-march-2022

Inflation measures how much the price of goods and services have increased over a period of time; and will have a significant impact on changes in the cost of living. An inflation rate of 5% means that on average the typical household basket of goods (e.g. food, TVs) and services (haircut, restaurant meal) is 5% …

Read more

Item added to cart.
0 items - £0.00