Households saved around £44bn in the second quarter of the year, according to official ONS data released yesterday. That takes the total amount of excess household savings since the pandemic began to about £185bn, or almost 9% of GDP. That’s an average of about £6,600 per household in the UK!
But averages can be deceiving. In reality, there are two quite distinct groups generating that healthy ‘average’ savings figure. The first group is made up of households in the top 20% of the income distribution, who have accumulated the majority of the excess savings during the pandemic. The other group is the bottom 20% of the income distribution, who saw their savings fall over the pandemic.
This explains why we’re concerned about the impact of the upcoming cost of living crisis. Over the next year, we expect the combination of higher utility bills, lower universal credit payments, tax rises, higher fuel prices and potentially higher student loan payments to eat into the disposable income of low-income households that aren’t likely have a large pool of savings to dip into.
The inevitable consequence is that these households will cut back on spending elsewhere in the economy, which is why we have recently downgraded our economic forecast for 2022. The hit will be even worse if the Monetary Policy Committee raises interest rates, as it’s expected to do next year.
What’s more, it seems unlikely that wealthier households will come to the rescue by spending their savings. These households prefer either to keep a higher level of savings or top up their pensions. And if they do spend some savings, it’s more likely to be on things like holidays or the housing market, which doesn’t feed through into higher GDP. Indeed, a key reason for the red-hot housing market is that bigger deposits are allowing households to bid up prices.
So, ‘households’ may be flush with cash on paper, but when it comes to savings it really is a rich man’s world.