“Forced vs Precautionary”

The key chart

Summary of CMMP analysis

Households (HHs) play a dominant role in the UK economy – their consumption accounts for 63p in every pound of GDP and their borrowing accounts for 76p in every pound lent.

In this context, heightened uncertainty, debt repayments and a marked increase in savings represent clear and rising risks to the economy and to bank sector profitability.

The £26bn record increase in HH deposits in May (6x the 10-year average monthly flow) reflects extreme uncertainty. HHs are repaying loans, notably consumer credit which has fallen -25% (annualised) over the past three months and -3% YoY (the weakest rate since 1994).

• Pre-COVID 19, HHs funded consumption by dramatically reducing savings…

• …during COVID 19, the savings ratio jumped sharply from an 11-year low of 5.2% in 3Q19 to 8.6% in 1Q20 (in-line with its LT average)…

• …Post-COVID 19, the key question is the extent to which these savings are “forced” (constraints on spending during lockdown) or “precautionary” (response to actual or possible unemployment) in the UK and in the euro area.

Financial sector balances provide important historic context here given that the UK economy was characterised by large and persistent sector imbalances previously. Increasing deposits and/or reducing loan liabilities are likely to be part of a structural shift towards higher levels of HH net lending/financial surpluses.

Financial flows may remain volatile but a sharp reversal with savings moving rapidly back into either consumption or investment appears unlikely given the UK’s starting position.

Look instead for further fiscal stimulus (eg, a temporary cut in VAT).

Please note that the summary comments above and the graphs below are extracts from more detailed analysis that is available separately.

Six key charts