Will pandemic savings save British households?

How much of our pandemic savings have we spent? This, it turns out, is a surprisingly difficult question to answer. We know that many people made ‘excess’ savings during the pandemic as huge swathes of the economy were shuttered by Covid restrictions (see chart). But we also know that finances are increasingly strained as high inflation eats away at real household disposable income: in the year to September 2022, that income fell by 2.8 per cent. 

Usually, we would expect households to cut back on spending as a result. But a pandemic savings ‘buffer’ might allow them to maintain their usual spending patterns even as their real incomes are squeezed. 

This is what the Office for Budget Responsibility (OBR) fiscal watchdog expects to happen over the next few years. According to its latest forecasts, savings will drop to around zero in 2023 and 2024 as households draw on their pots to “support consumption in the face of weak real income growth”. 

But although this sounds very plausible, the Bank of England (BoE) sees a different path ahead. In February, the BoE forecast that savings rates would rise above their historic average over the next few years (see chart), as households put more aside as precautionary savings as the economic outlook darkened. 

Higher interest rates might encourage more saving, too. Between October and January, the value of deposits in interest-bearing time accounts jumped by £27bn (exceeding the £13.3bn increase in total deposits), as households locked cash away to secure more attractive interest rates. Economists at Pantheon Macroeconomics said that the movement of deposits between different types of bank accounts “suggests that households do not intend to draw on them to make purchases soon”.

This makes it hard to say whether the OBR or the BoE will ultimately be proved right. Panmure Gordon chief economist Simon French said that there were “very respectable arguments on both sides for why each path makes sense”, adding that the difference between the two forecasts was “as striking as it is unprecedented”. French said that current spending data favours the OBR’s drawdown theory, and suspects that the BoE will revise its more pessimistic assumptions in its next report.  

But even if consumers do run down their savings pots, it is difficult to work out how much is left in them. One option is to look at the savings rate, which tells us how much households are putting away each quarter. By adding up the flow of savings over and above the pre-Covid trend, we can work out the stock of ‘excess’ savings acquired over the course of the pandemic. 

Using this method, Ashley Webb, UK economist at Capital Economics, calculates a sum of £294bn – or almost 12 per cent of gross domestic product (GDP) (for context, the substantial tax cuts announced in Kwasi Kwarteng’s mini-Budget added up to £45bn). But this is almost certainly an overestimate: Webb notes that the measure doesn’t adjust for any funds that have been invested in housing and financial assets or used to pay down debt. Although this money was in households' savings at some point, it might not be any longer. 

An alternative method is to look at the amount of cash actually held in households’ bank accounts. This initially suggests a healthy stock of household savings – around £200bn higher than the pre-pandemic trend. But Webb found that once inflation was accounted for, households’ stock of savings fell below pre-pandemic patterns. 

High inflation has rendered households’ savings “less powerful”, and we could find that savings buffers are not able to support spending in the months ahead. It may be that consumption patterns start to move back in line with income growth as a result – tough news given that real disposable income is expected to fall over the next two years. The UK economy could face an unpleasant bump if our pandemic savings cushion isn’t there any more. 

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