Why Britain won't splurge its savings

After the pandemic, we heard a lot about the ‘excess savings’ that households had amassed. And no wonder – as the chart below shows, the household savings ratio soared to over 27 per cent in the second quarter of 2020 as lockdowns took hold. When there was nothing to spend on, households saved. 

The savings ratio is lower today, but still far above the 2015-19 average of 6.3 per cent, as the chart shows. Yet the motivations for putting money away have changed significantly since the dark days of lockdown. Higher interest rates made saving more attractive, while consumers have also made ‘precautionary savings’ against a difficult economic backdrop. But as the outlook brightens, will consumers finally feel confident enough to dip into their rainy-day funds?

UK households will start spending more in 2024 

Economists at Pantheon Macroeconomics think that rising real wages and lower mortgage rates will leave households able to spend more this year. Tellingly, the share of households without enough savings to cover an £850 expense has fallen to around a quarter, down from a third in February 2023. Economists doubt that households will feel compelled to save a larger share of their incomes this year, and expect higher pay to feed through to spending as a result. 

But the prospect of a spending splurge will worry central bankers. In February, Bank of England rate-setter Catherine Mann said that consumers were showing a lack of “discipline” in refusing to pay higher prices, something that was fuelling sticky prices in the services sector. In many cases, high-income households have maintained enough income for discretionary purchases despite the wider cost of living squeeze. Mann warned that they were spending “disproportionately” on travel, eating out and entertainment. As rates fall, these households might dip into their savings pots – fuelling domestic demand further. 

But Capital Economics’ Simon MacAdam thinks that “central bankers need not be kept up at night worrying about a tsunami of pent-up demand being unleashed in the real economy”. The deputy global chief economist said that the concept of excess savings has become largely ‘redundant’ when it comes to economic forecasting. He neither expects savings to throw inflation off course, nor delay interest rate cuts. 

Spending won’t delay rate cuts

It seems obvious, but households with savings pots have already revealed themselves as having a low propensity to spend. MacAdam argues that if pandemic savings weren’t exhausted as the cost of living crisis raged, they probably won’t be over the year ahead either.

Many households have also used excess savings to buy property – either outright, or through higher mortgage deposits. Data shows that households have also invested more in stocks, bonds and pensions than they would have done in the absence of the pandemic. Although these savings haven’t been ‘spent’ in the conventional sense of the word, they are still locked up in asset markets – making them harder to spend this year.

The US picture is different 

Things are slightly different across the pond. In the US, households have made more of a dent in their excess savings – which could go some way to explaining buoyant economic performance this year. On one level, this means the Fed has less to fear from a savings-driven consumption boom. But they could still face a demand shock from elsewhere. With US markets going gangbusters, some analysts expect a ‘wealth effect’ from rising asset prices to fuel consumption growth over the year ahead. 

Analysts at Capital Economics forecast a gradual acceleration in consumption growth thanks to rising asset prices, while analysts at Bank of America expect resilient household spending this year as a result. This probably won’t be enough to trigger a demand surge, but rather a gentle strengthening: after all, much of this ‘paper’ wealth might not be spent at all over the next few years. From a policy perspective, excess savings look like more of a macroeconomic safety net than a trap door.