By Valentina Magri
The Bank of England (BoE) gave us both good and bad news during the presentation of the last inflation report in February.
The good news: the UK will be one of the fastest-growing advanced economies, with a GDP growth equal to +2.6 per cent. The bad news: this growth relies too much on consumer spending. Indeed, the inflation report shows that consumption contribution to GDP have risen from 0.4 percentage points of the second quarter of 2013 to 0.8 percentage points in the third quarter of 2013.
BoE projects that consumption is likely to have grown by around three-quarters of a percentage point in the last quarter of 2013. As a consequence, consumption contribution to GDP for the entire year is likely to have been stronger than projections in the November report. But increasing consumer spending results in a decreasing household saving ratio, so let’s take a good look at the state of British savings.
Identikit of British savings
More than 12,000 British consumers were interviewed about their savings during the third ING International Survey conducted between 24th October 2013 and November 2013 by Ipsos.
The study shows that English citizens are less reluctant to spend money since the global financial crisis: only 62 per cent of them, compared to an European average of 64 per cent, were still being cautious with spend. Furthermore, savers believe the recovery has taken shape in Britain: the percentage of Brits who said the crisis has impacted their finances has diminished from 44 per cent to 36 per cent.
Worryingly, the household saving rate is diminishing, but UK citizens are still comfortable about the amount of the available savings, which has increased from sixth to fourth place in Europe. But if we look at the people who responded not to having any savings, we notice that they have diminished: from 28 to 27 per cent of the respondents. Essentially, it means that English citizens are happy with saving less.
People without savings tend to rely too much on credit cards, the most common type of personal (non-mortgage) debt in the UK. 30 per cent of those without savings have a credit card, compared with 18 per cent of those not having a credit card.
Been savings-excluded is very risky. In the case of a sudden income fall, a third of British families admit that they would not have enough money in savings to support their current spending for three months. This percentage is well below the European average (39 per cent).
Even more disconcerting is that 19 per cent of English people do not even know the total amount of debt they have.
How does it happened?
BoE governor Mark Carney believes cheap borrowing costs are the main cause of an over reliance on debt: “This has led households to save less and spend more, and has prompted a strengthening in the housing market.”
An increase in spend obviously has an impact on the household saving ratio, which is diminishing. According to the BoE, the main drivers of this fall are a reduction in uncertainty and expectations of a higher future income. This view is supported by an improved consumer confidence. Moreover, easing credit conditions have played a role in boosting the expenditure of credit-constrained households.
Finally, it is worth bearing in mind that Brits have never been fond of saving: according to Eurostat data, their household saving rate has always been lower than the European average in the last decade.
What does it imply?
Apart from an unbalanced GDP growth based on consumption spending, a low household saving ratio also triggers high levels of debt. Regarding this issue, the ING senior economist Ian Bright argued: “The UK still has some of the highest levels of personal debt in the developed world, so you could argue that they have a bigger mountain to climb in terms of establishing prudent finances than their fellow Europeans”.
Saving money – the latest frontier of climbing – must become a national pasttime in the UK?
