Economist's view: Consumers tempted to spend may decide to listen to the material girl instead
By Nitesh Patel, Strategic Economist at Yorkshire Building Society
Talking about money is one of the last British taboos, but we all know it’s important. As immortalised into popular culture by the Material Girl herself more than 35 years ago, “only boys who save their pennies, make my rainy day.” Since last March, many of us have had an unparalleled opportunity to look after those pennies – and households who have increased their financial security may well be inclined to hang on to these.
For those of us who have been lucky enough to work from home throughout this pandemic, the motivation to spend money when the economy reopens is strong. After almost a full year depriving ourselves of normality, the vaccination and gradual reopening of the activities we’ve missed for a year has contributed to the feeling that we are finally on the cusp of freedom. Spending cash amassed in savings is an extremely tempting prospect.
Thanks to being stuck in their houses with, in many cases, reduced overheads and limited opportunities for spending, many home-workers are in the envious position of having amassed a substantial amount of savings. Comparatively, Britons are lower savers than our European neighbours, with French and German populations historically putting aside much more than their UK counterparts. But perhaps the pandemic has provided a once-in-a-lifetime opportunity to build up their savings resources, with fewer opportunities to spend.
Office of National Statistics data shows that the household savings ratio, a measure of household savings to disposable income, rose from a paltry pre-pandemic 7.7%, to a whopping 25.9% in the second quarter of last year, dropping back to 16.1% in the last quarter, but still standing at more than double the average of the years leading up to the pandemic. At one point it was as low as 4.7% in 2017.
During recessions, the savings ratio tends to pick up as workers become concerned about future jobs prospects and start building up their financial resilience as buffer against any drop in incomes or as a precaution. And, in the past, job insecurity has remained at an elevated level for a number of years following the recession, with the savings ratio remaining correspondingly high. This was the experience after the credit crunch recession over a decade ago.
Our own estimates suggest that, on aggregate, households have ramped up their excess savings – money deposited over and above their normal savings – by £130 billion since last March. This could rise to £180 billion by the middle of the year, according to the Office for Budget Responsibility (OBR). To some extent, the sharp rise has been driven by an increase in precautionary saving – uncertainty has caused households to save more for a rainy day. However, the combination of government support for households’ incomes, and lockdowns physically preventing spending, are unique features of this downturn, which have also helped to drive up deposits.
The key question is what happens to savings after a successful vaccination programme and a return to normality. The OBR estimates a quarter of this will be spent over the next five years, reducing the household saving ratio to 0.5% lower than it would have been otherwise, that is, had the pandemic not happened.
What happens to the stock of excess savings depends on who has been doing the saving. A recent Bank of England survey suggests that the rise in savings has indeed been mainly by better-off households, with 42% of high-income households saving more and 16% less, compared to 23% of low-income households saving more and 24% saving less.
We know that higher income groups tend to spend less and save more, but unsurprisingly, we see the opposite for low-income groups. Another survey for the Bank of England suggests that additional savings built up during the pandemic found that only 10% planned to spend them, with around two-thirds planning to retain them in their bank account. Additionally, some households may decide to use savings to pay down debt or fund spending that would otherwise have been financed by borrowing. UK consumers have been heavily reliant on credit for the past three decades, but in last year not only have they become savers they have also been paying back on credit in record numbers.
Chancellor Rishi Sunak is perhaps hoping that home-workers, bleary-eyed from what’s felt like a year-long Zoom call, will get out and spend their hard-saved cash to help British businesses which have struggled through the lockdown to kick start the economic recovery. The pandemic has been, for many, a life-changing opportunity to save a high proportion of disposable income for a year. Those who have been able to pay off debt, or save for the first time, may well look at their finances with a level of satisfaction and comfort they’ve previously not experienced.
A stark reminder of this is the unevenness which has been brought into sharp focus over the past 12 months, leaving many in a financially precarious position. The Financial Conduct Authority’s Financial Lives 2020 survey found the impact Covid-19 has dramatically increased financial vulnerability, with under-35s and the self-employed bearing the brunt of this. A total of 20m adults have seen their financial situation overall worsen because of Covid-19.
A quarter (27%) of all employees were furloughed and one in six (17%) employees said that their employer had cut their hours. Those experiencing a negative life event in the previous 12 months increased from 10.5 million (20%) in February to 15.3 million (29%) in October.
Those who have improved their financial situation by saving or paying down debt may well be thinking long and hard about how much they can afford to spend as the economy reopens, rather than succumbing to the temptation of a spending spree.
Though as the Bank of England’s Chief Economist Andy Haldane was quoted as saying recently: “People are not just desperate to get their social lives back, they want to catch up on social lives they have lost over the past 12 months. That might mean two pub, cinema or restaurant visits a week rather than one.” But I suspect Andy, like the Material Girl, would also encourage everybody to think about that rainy day and life’s little emergencies.