Sunday, October 04, 2020
This nation of unexpected savers has money to burn
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Extraordinary things have been happening during this coronavirus crisis, and it is throwing up some extraordinary numbers. I could give you second quarter gross domestic product, now revised down slightly to show a fall of 19.8% (from 20.4%), still more than seven times its previous biggest recorded quarterly fall, 2.7% during the three-day week in early 1974.

I could also give you the plunge in the number of people on payrolls, 695,000 between March and August, or anything related to the public finances, where the official projection, a £372bn budget deficit this year, is nearly two and a half times the previous peacetime record, £158bn in 2009-10.

Let me however today focus on another number, the saving ratio. For as long as I have been following these things, which is a very long time, the worry has been that people in the UK do not save enough. We are a nation of spenders not savers, unlike some other countries, and the worry has traditionally been that we leave ourselves unprovided for emergencies, reductions in income and retirement.

Well, for three months this year, all those worries were turned on their head. Typically, the saving ratio, the amount saved as a proportion of disposable income, is low. There are technical arguments about the definition of savings, but we can put them aside. Typically, the saving ratio shows that we put aside between a twentieth and a tenth of income, and usually closer to a twentieth.

In the second quarter, however, things changed dramatically. The saving ratio shot up to nearly a third of income. To be precise, it rose to 29.1%, from 9.6% in the previous quarter, 7.7% in the final “normal” three months of last year, and a recent low of just 4.7% during 2017.

Most of that exceptional increase in saving was involuntary. People saved because they could not spend, including the period when most non-essential shops were closed. Not everybody is able or willing to shop online. During this period of involuntary saving, there were also four consecutive months in which households repaid past borrowings in the form of consumer credit.

Not all of it was involuntary. One of the traditional motives for saving is the precautionary motive; people save because they fear tough times ahead, including unemployment, and the Office for National Statistics (ONS) detected some increase in voluntary saving “in response to the higher levels of uncertainty around their future employment prospects”.

The balance between the involuntary and voluntary motivations for the second quarter surge in saving is an important one. If it was mainly involuntary this would suggest that we ended the period of lockdown earlier in the year with a reservoir of unspent money. If it was mainly voluntary then you might fear that households will be battening down the hatches for some time to come. This would be Keynes’s paradox of thrift in which, by virtue of their saving, people make things worse for the economy and for their employment prospects.

The evidence is that it was largely involuntary. That is what the ONS thinks was the man reason for the surge in the saving ratio. Supporting evidence is provided by the fact that the last time people were really worried about unemployment, during the financial crisis, the saving ratio also rose, but only to 12.2%.

Have people already spent their involuntary savings? It is now more than three months since the end of the second quarter and in that time retail sales have shown a strong and, dare I say it, V-shaped recovery. In August, the volume of retail sales was not only 4% above February’s level, before Covid hit the economy, but 2.8% above August 2019.

If you are wondering why high streets are not putting out the bunting, it is that online sales have increased from less than fifth to at times nearly a third of all sales. The latest share was in the high 20s. Food retailers and DIY stores have also done well.

Does this mean that households have blown the lot, and all that extra saving in the April-June period has now been spent? No. Many people equate retail sales with consumer spending, but that is a mistake. Retail sales account for less than half of consumer spending.

People are still involuntarily not spending on things they would normally spend money on, for good reason. In many cases official restrictions mean that they cannot do so.

Visa data monitored by the Bank of England shows that while spending on food is up by an average of 25.7%, year-on-year, since March, most other categories of spending are well down. That includes clothing and footwear, down 18.2% on the corresponding period of last year, but also transport, down 35.4%, recreation and culture, down 11.2%, and hotels and restaurants, down by 41.8%. Not going out, and not travelling to city centre offices, has a big impact on people’s spending.

Thus, while the saving ratio in the third quarter should show a big drop compared with the second, though we will not get the figures until January, quite a bit of this additional saving has carried over. It isn’t necessarily a wall of money but it suggests that, just as retail sales benefited from the release of pent-up demand, so will other sectors, once they are able to open up safely.

Sadly, it looks as though will not be in time for the panto season this year. The question is how much will be left of the hardest-hit sectors, once restrictions ease; the things that people like to spend money on when they are able to do so. Otherwise, the saving habit that we saw forced on people during the spring could become permanent, and for all the wrong reasons.