Friday, June 29, 2007
A 2% saving ratio
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

GDP growth was confirmed at 0.7% in the first quarter, though the annual rate is now put at 3%. Ther most striking figure in the latest quarterly national accounts, however, was that the saving ratio has slumped to a new low of 2.1%, from 6.3% a year earlier. This must presage a spending slowdown. Details here.

Comments

"This must presage a spending slowdown."

Is it possible that the UK consumer is getting much the same deal as the US consumer?

The US consumer has been running with no savings and spending for years - and why not - thier spending has been helped out with a continuing capital account surplus which has kept interest rates low.

Posted by: J Law at June 29, 2007 09:47 PM

House prices won't fall simply because they are historically high. Similarly, the saving ratio won't rise just because it's historically low. Something else is needed to trigger a reversal. In the past, this has typically been a combination of higher interest rates, weaker asset prices and - perhaps most crucially - a shock to expectations.

If you (1) believe that interest rates don't need to rise much further, if at all; and (2) that house prices are more or less fairly valued, then why should consumers start to save more? This all seems a bit inconsistent to me.

To me, this is conclusive proof that real interest rates are too low. Unless they rise and generate a slowdown, the economy will be much more vulnerable to a more dramatic correction at some point in the future.

Posted by: Sell Everything at July 2, 2007 07:12 AM

Not really. Real interest rates have already risen since the first quarter and are set to rise by more - even if nominal rates don't rise much. Mortgage equity withdrawal will always tend to be greater during periods when house prices are rising strongly, rather than when housing activity slows and prices stop rising. We don't know, of course, whether the saving ratio for the first quarter will be revised but assuming not, it tells a story that consumers have tried to maintain their spending even as income growth has slowed sharply. You would not expect that to continue for too long.

Posted by: David Smith at July 2, 2007 09:08 AM

'Real interest rates have already risen since the first quarter and are set to rise by more - even if nominal rates don't rise much.'

I'm not really buying that. Real interest rates are much better defined as nominal rates less expected inflation, rather than actual inflation (from a couple of months previously). On this argument, the MPC should have hiked rates by over 100bp last year to prevent real interest rates falling.

'You would not expect that to continue for too long.'

Again, I don't follow. The US household saving rate has fallen steadily for a decade or so. It's now negative and has been for about a year. What's to stop households in the UK doing the same?

If you plot household net wealth from the National Accounts (financial plus physical assets less financial liabilities) as a per cent of household disposable income, it shows a pretty good inverse relationship against the household saving rate. Right now, with house prices still rising pretty quickly and equities showing some strength, there seems little reason for households to rebuild saving.

Posted by: Sell Everything at July 2, 2007 09:46 PM

There certainly appears to be many headwinds for the UK economy to deal with. In and of itself, a low saving rate may not have to presage a slowdown spending if asset prices (primarily housing and stocks) continue to support household balance sheets. That said, the fewer props household spending has to fall back in the event of an asset price slowdown the greater the risk for a deeper retrenchment.

Posted by: Econocator at July 3, 2007 02:28 PM

A minor comment...
But in your opinion, can the UK economy further improve? Can we have a lower unemployment? a higher growth? a lower inflation? and higher house inflation to proviode with a free ATM in case we feel tired to go to work? can max bonuses be paid every year to everybody?
if all that is what you believe, then do not worry there will never be a slowdown, there will never be triggers for a house price crash, let us just set the economy on autopilot... but, hey, social problems will then emerge, taxes will be raised, tenant protection will be reintroduced.
You cant just have everything the way you want!

Posted by: Michele at July 7, 2007 01:44 PM

In general, of course, economies do improve - they grow - and over time, as a result of that growth, house prices rise. This does not happen year-in, year-out, though it (growth) has happened now in the UK for 60 consecutive quarters. Whether unemployment rises or falls depends on the supply of labour and whether growth is above or below trend. I think what you're trying to say is that at some stage there will be a recession, and we can be pretty sure there will be. But at the moment, the official concern is about too much growth, not too little.

Posted by: David Smith at July 8, 2007 09:34 AM
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