The key chart
The key message
Surprise and sensational headlines may follow the release of two UK data points this week – the 1Q22 household savings ratio (ONS, Thursday) and consumer credit growth for May 2022 (BoE, Friday). Neither would be justified.
Official UK forecasts already assume (1) that real household disposable income will fall in 2022 and 2023, and (2) that the savings ratio will fall to a record low at the start of 2023, in response. In practice, this means that some UK HHs will run down the c£166bn of excess savings built up during the pandemics while others take on more debt.
We know from the “messages from the UK money sector” that HH monthly money flows (savings) are already trending back towards pre-pandemic levels and that monthly consumer credit flows have recovered to exceed pre-pandemic levels over the past three months. Nothing surprising nor sensational so far. Indeed both trends reflect an important return to normality after the pandemic.
That said, current trends are not all “good news.” There are negative implications here for both financial equality and economic sustainability.
Excess savings have typically accrued to HHs that already have sizable savings, have higher incomes, and are much older. These HHs typically spend less from any extra savings they accumulate. In contrast, lower-income HHs, with higher marginal propensities to consume, are more likely to borrow more to support consumption. The result? Greater financial inequality in the UK.
The OBR’s forecasts also assume that the UK HH sector ultimately moves from its traditional role as a net lender to the rest of the economy to being a sustained net borrower. Such a transition would involve remarkable role reversals from the pandemic period when the government took exceptional measures to protect HH incomes from the full effect of the crisis. More concerning here is the fact that the implied shift to replace public borrowing with more private borrowing reflects the flaw in conventional macro thinking that typically ignores the risks associated with private debt while seeing government debt as a problem rather than as a solution.
Unfortunately, this is neither new nor surprising news either.
“Don’t be surprised”
Surprise and sensational headlines may follow the release of two UK data points this week – the household savings ratio (ONS, Thursday) and consumer credit growth (BoE, Friday). Neither would be justified.
Recall that in March 2022, the OBR’s “Economic and fiscal outlook” forecast that real household (HH) disposable income will fall by 1.5% this calendar year and by 0.2% in 2023, before recovering steadily to average 1.7% from 2024 onwards (see chart above).
In the face of weaker real income growth, the OBR already expects HHs to save less than previously forecast and for the savings ratio to reach a record low of 2.8% by the start of 2023. In practice, “the lower saving ratio will reflect some HHs running down excess savings while others take on more debt” (Economic and Fiscal Outlook, March 2022).
Since the start of the COVID-19 pandemic, UK HHs have accumulated excess savings of c£166bn in the form of bank deposits (see chart above). We know from the “messages from the money sector”, however, that monthly HH money flows have moderated back towards pre-pandemic levels during 2022. In April 2022, these flows totalled £5.7bn, 1.2x the average pre-pandemic flows. At their peak in May 2020, these monthly flows had reached £26bn, 5.5x pre-pandemic levels (see chart below).
We also know that consumer credit borrowings over the past three months have been higher than the average pre-pandemic monthly borrowings. In February, March and April 2022, HHs borrowed £2.0bn, £1.3bn and £1.4bn respectively. These flows compare with the pre-pandemic average of £1.0bn. The annual growth rate of consumer credit also increased to 5.7% YoY in April 2022 from 5.2% in March 2022, the highest YoY growth rate since February 2020 (see chart below).
Nothing surprising nor sensational so far. Indeed both trends reflect an important return to normality after the pandemic. That said, these current trends are not all “good news.” There are negative implications here for both financial inequality and economic sustainability.
Excess savings have typically accrued to HHs that already have sizable savings, have higher incomes, and are much older. These HHs typically spend less from any extra savings they accumulate. In contrast, lower-income HHs, with higher marginal propensities to consume, are more likely to borrow more to support consumption. The result? Greater financial inequality in the UK.
The OBR’s forecasts also assume that the UK HH sector ultimately moves from its traditional role as a net lender to the rest of the economy to being a sustained net borrower (see chart above).
Such a transition would involve remarkable role reversals from the pandemic period when the government took exceptional measures to protect HH incomes from the full effect of the crisis. More concerning here is the fact that the implied shift to replace public borrowing with more private borrowing reflects the flaw in conventional macro thinking that typically ignores the risks associated with private debt while seeing government debt as a problem rather than as a solution.
Unfortunately, this is neither new nor surprising news either.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.