Household Saving Has Whipsawed Over The Past Three Years

17th July 2023

During the pandemic, there was an unprecedented surge in
household saving, accompanied by substantial debt repayments.
Between February 2020 and May 2021, total household deposits
in banks and building societies rose by £247 billion, while the
stock of consumer credit fell by around £28 billion. Overall,
household balance sheets improved throughout the pandemic.
To a large degree, this reflected government interventions that protected incomes coupled with the limited opportunities for spending. But the impact varied significantly between different
types of households. Among the lowest income quintile, 21
per cent of individuals reported an increase in savings during
the pandemic, compared to 42 per cent among the top-income
quintile.

As Covid-19 concerns waned, and the economy began to rebound,
inflation started to rise. In February 2022, Russia's invasion
of Ukraine triggered a significant shock in energy and food
prices that pushed inflation to a peak of 11.1 per cent by late
2022, putting a vicious squeeze on living standards. Survey data
indicates that some families resorted to reducing their savings
in response, with those on lower incomes more likely to say their
savings fell compared to those with higher incomes: among the
bottom income quintile, 48 per cent of individuals reported a
reduction in their savings between December 2022 and March
2023, in contrast to 29 per cent in the top income quintile. This
reflects the fact that households in the lowest income quintile
allocate a larger portion of their consumption towards the
essential items whose prices rose most compared to households
in the highest income quintile (59 per cent compared to 43 per
cent), leaving them with less flexibility to cut back in the face of
price shocks.

Given the anticipated impact that rapidly rising prices
would have on real earnings, most forecasters predicted that
households would need to deplete their pandemic savings to
sustain their consumption through late 2022 and into 2023.

The Office for Budget Responsibility (OBR) projected that the
adjusted saving ratio would fall to around zero in 2023 and 2024.

Notwithstanding most recent data pointing to a record level
of withdrawals from banks and building societies, the relative
stability of the saving ratio up to Q1 2023 has been surprising.

One factor contributing to this discrepancy is the surprising
strength in real income growth: real household disposable
income is estimated to have fallen by 1.8 per cent in 2022-23
compared with a fall of 3.7 per cent forecast by the OBR, a
difference of £28 billion.

To counter the spike in inflation the Bank of England has
raised interest rates for a record 13 consecutive meetings of the
Monetary Policy Committee since December 2021. The move to higher rates is boosting the income of richer, typically older
families, but is hitting those with significant debts who tend to
be younger. On average, in 2018-20, individuals aged 65-74 had
more than five times the amount of interest-bearing savings
compared to those aged 25-34 (£57,000 and £11,000 respectively).
By contrast, younger borrowers, particularly mortgage holders,
face higher interest payments. However, the adverse effects
of this have yet to be fully felt: by the end of June 2023, only
around 56 per cent of households with mortgages will have been
affected by the increasing mortgage rates.

But, despite the better-than-feared news on incomes, UK
households have not increased consumption in response:
real consumption expenditure has remained relatively stable
throughout the latter half of 2022 and into 2023, and remains 2.2
per cent below a continuation of its pre-pandemic trend. Instead,
UK households have instead continued to save at elevated levels
relative to before the pandemic, at least up to Q1 2023. This is in
contrast to the US where consumption has seen strong growth
since the start of 2021 and has returned to its pre-pandemic
trend. As a result, US households are actually saving less than
they were pre-pandemic.

Why might UK households be more cautious? There are three
main factors that may be at play here. First, with much of the
mortgage repayment shock yet to come, indebted homeowners
might be adjusting their consumption behaviour in anticipation.
Second, as has happened in the past, the highly uncertain
economic outlook may be contributing to households' caution.

Finally, unlike in the US, UK households remain highly
vulnerable to volatile gas prices ahead of next winter and there
is significant uncertainty about the long-term impact of the
terms-of-trade shock on the country's overall living standards.

Note
This is one chapter from Peaked Interest report published by the Resolution Foundation on 17 July 2023.
To read the full report go HERE