Wednesday, 20 January, 2021
U.K. INSIGHT: 150 Billion Reasons Why the Recovery May Surprise
U.K. INSIGHT: 150 Billion Reasons Why the Recovery May Surprise
By Dan Hanson (Economist)
(Bloomberg Economics) —
The U.K.’s economic recovery is on ice because of a resurgence in Covid-19 and measures to tackle it. But it’s not all doom and gloom. The health of household balance sheets should mean the economy rebounds quickly once enough people are vaccinated and restrictions lifted.
Together with a faster than anticipated vaccine roll-out, a consumer spending boom is the biggest upside risk to our forecast.
The combination of restrictions on everyday life limiting the opportunities to spend and the government’s unprecedented income protection schemehas seen household saving surge over the past 12 months. The saving rate skyrocketed to 26.5% of disposable income in 2Q20 — the highest reading on record — and remained elevated at 16.5% in 3Q.
What households do with their savings varies. Some buy financial assets or add to deposits, while others pay off personal loans or mortgages. The National Accounts tell us what households have done. What’s striking is that the vast majority of savings accumulated during the pandemic were placed in deposit accounts.
Households Have Put Their Cash in Deposits
Source: ONS, Bloomberg Economics
As a result, the stock of deposits has risen by about 148 billion pounds since the end of 2019. Some would have been accumulated anyway, so to account for that we have filtered the stock of deposits to uncover a measure of ‘excess deposits’. It shows that at the end of 3Q20, households were sitting on a 91 billion-pound slush fund.
‘Excess’ Deposits Have Soared
Source: Bloomberg Economics, ONS
That number is likely to have risen in 4Q20 and the current quarter as a result of lockdowns and continued government support. Based on our forecasts for income and spending, we estimate a further 60 billion pounds of excess deposits might have been added over this period.
The fact that households have chosen to keep so much of their excess savings readily available suggests they are either worried about the outlook (and will therefore put the cash to better use when uncertainty recedes), or they are preparing to spend when restrictions are eased. Both are likely to be true, because households have had different experiences over the pandemic. But which one proves the more dominant influence has big implications for our growth forecasts.
Reasons to Spend
- After being starved of opportunities to go out, social spending could pick up pace quickly as restrictions are eased if the vaccine reduces concerns about contracting the virus. The boost will be particularly large if the spending habits picked up during the pandemic, notably the increase in spending on household goods, are maintained.
- Some purchases will have been delayed and are likely to take place once the economy reopens. For example, car sales are down on the year.
- Rock bottom interest rates mean the rate of return on deposits is extremely low, thereby providing little incentive to hold cash in the bank.
Reasons to Save
- Fear that the pandemic could return in a new form, may mean a slower decline in the saving rate to as households seek to maintain a larger buffer than we currently forecast.
- Unemployment is also likely to rise this year as the furloughscheme ends. Joblessness (or the threat of it) tends to reinforce the appetite of households to maintain a precautionary buffer.
- While saving has risen at an aggregate level, it’s likely to be unevenly distributed toward higher earnings. Those individuals have a lower marginal propensity to consume.
- Talk of eventual tax rises to ‘pay for’ the government support during the pandemic is likely to mean households are more reticent to open the spending taps fully in coming quarters.
Household Savings Set to Decline
Source: ONS, Bloomberg Economics
Our Central Forecast
In our forecast, we see the saving rate dropping back sharply from 20.5% at the start of this year to 10% in 4Q. That helps the economy go from 12% below its pre-virus level in 1Q to just 2% below it in 4Q. The saving rate then trickles down over the reminder of the forecast to 9%, which we have previously estimated to be the equilibrium saving rate in the economy.
That path mirrors the trajectory of unemployment, which falls from a little under 6.5% at the end of this year to 4% by the end of the projection period in 2024.
Given the amount of fuel available and the experience over the summer last year when restrictions were eased and spending picked up rapidly, our view is there’s a bigger risk of consumer spending rebounding faster than we expect once the economy is reopened.
Dan Hanson covers the U.K. for Bloomberg Economics in London. He previously spent seven years at HM Treasury working on a variety of U.K. macroeconomic issues.
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