Sunday, April 04, 2021
Will Britain's consumers splash their stash of cash?
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.

Many conversations about the UK economy involve consumer spending, which is not surprising. In normal circumstances – counting 2018 and 2019 as normal – it accounts for 62 per cent of the country’s gross domestic product. Most of those conversations, over the years, have been about whether consumers are over-exuberant, and are taking on too much debt to fuel their spending habit.

Today, the situation is rather different. The health warning I have to provide at this point is that not everybody had the opportunity during the pandemic to build up savings – some have had a very tough time – but in aggregate this has been what happened.

Official figures last week showed that the final quarter of 2020 completed a trio of very high saving ratios, gross savings as a proportion of disposable income. It ended the year at 16.1 per cent, having leapt to 25.9 per cent in the second quarter, and come in at a still high 14.3 per cent in the third quarter. For last year as a whole it averaged 16.3 per cent, a record high, up from 6.8 per cent in 2019.

To put some numbers on this, household gross saving last year was £238 billion, compared with £99 billion in 2019, a jump of £139 billion, or nearly 7 per cent of last year’s GDP. Most of these savings were, in the jargon, involuntary. People could not spend on the things they normal spending on; transport and travel, leisure, entertainment, eating out, and so on, so they put the money aside instead.

There are some figures on this too. Last year consumer spending fell per cent in real, inflation-adjusted, terms by 10 per cent. The fall included an 11.8 per cent drop in spending on clothing and footwear, 33 per cent in transport, 5.8 per cent in recreation and culture and a huge 42.1 per cent on restaurants and hotels.

All these things are interlinked. Not going so much to the office, and maybe not at all, reduces spending on transport and office wear, while not going out so much at all means that people did not need to buy as many new clothes. Some elements of spending did rise, with food and drink up 7.7 per cent, alcohol and tobacco by 7.9 per cent and household goods and services 4.5 per cent higher.

As for debt, the past year has been anything but debt-fuelled as far as consumer spending is concerned. While households have been taking on more mortgage debt, reflecting the surprisingly strong pandemic housing market, levels of outstanding consumer credit have been falling. In February they stood at £197 billion, nearly £28 billion lower than a year earlier.

What happens now? It is the key question for very many businesses. It will determine the strength of the post-lockdown bounce for hospitality, travel and tourism and high streets, as physical retail resumes. It is key to whether private new car registrations, down in the first two months of the year by 38 per cent on a year earlier, recover. It is, given the importance of consumer spending in the economy, central to the strength of the recovery.

There are three possibilities. The gloomiest in terms of spending would be if households not only hang on to all the savings they have accumulated during the pandemic but also extend their new prudence into the post-lockdown period. We will not know the answer to this for a while because, when we get figures for the first quarter in a few weeks, it is likely that the saving ratio will have remained high because of the lockdown.

The second possibility is that households retain most of the savings of the past year but return to a more normal saving ratio of 6.5 to 7 per cent of income from the current quarter onwards. This would assume that the excess savings during the pandemic were involuntary rather than precautionary.

The third and most bullish would be that people blow most of the savings they have accumulated, as well as returning to normal savings levels (which traditionally have been regarded as too low).

Ruth Gregory, an economist with Capital Economics, has looked at how this might pan out. Capital assumes that the saving ratio will not remain elevated for long, in contrast to the period after the financial crisis. This time, people will have less reason to worry about unemployment, with the rate set to peak at a much lower level than after previous recessions.

As for dipping into the accumulated savings, which as I say will have accumulated some more over the past three months, if households spend a quarter of the near £140 billion of the past year, it will boost consumer spending by 2.8 per cent and GDP by 1.6 per cent. If they spent half, we would soon be talking about a huge pent-up demand boom.

What will happen? The pandemic has broken new economic ground, and the question is whether the traditional evidence, that households do not typically go out and spend most of an unanticipated build-up in wealth still holds. A lot of the extra savings have been in better-off and retired households, and night clubs may wait in vain for the latter to turn up and party the night away.

The Bank of England has taken a very cautious approach to this, assuming that only 5 per cent of pandemic savings are spent over the next three years. The Office for Budget Responsibility (OBR), the official forecaster, expects a quarter to be spent, but only over five years. Capital, while expecting the saving ratio to return to normal levels, does not expect any splurge of the accumulated savings.

Perhaps that is no bad thing. Even without most or all of those savings, the Bank has 5 per cent growth this year, 7.25 per cent next; the OBR 4 per cent and 7.3 per cent respectively, and Capital 5.6 per cent and, also, 7.3 per cent.

Much more than this and you might worry that the economy, which has been hit hard by the pandemic, soon overheating, with inflationary consequences. Households, in aggregate, have built up a stash of cash. It is probably best that they do not splash too much of it too quickly.