Personal savings as a percentage of UK GDP are at a record low following successive months of falling income and rising living costs.
The savings ratio, which measures the level of personal savings against disposable income, was at 1.7% for the the first quarter of this year – down from 3.3% during the final quarter of 2016. This is the lowest it’s been at since records began in 1960.
In real terms, gross savings have been falling fast since last year. During the third quarter of 2016, Britons held £17.7 billion worth of personal savings. This fell to £11 billion during the following quarter, and again to £5.6 billion during the first quarter of this year.
Meanwhile, consumer credit (that is, personal borrowing including things like credit cards and car finance loans) has been steadily rising, going up by 10% over the past year. It is this kind of borrowing, and related spending, that largely characterised the economic recovery since the Brexit vote. With interest rates slashed by the Bank of England, saving generally became less profitable, while borrowing became cheaper.
On a short term basis, rate cutting helped, and the ensuing increased spending and borrowing looked to be positive signs at least in the sense that they demonstrated some confidence on the economy. However, as these trends have continued, concern about their sustainability has been growing.
Savers are simply not being provided with either the incentives or, in many cases, simply the ability to afford to save. Consumer website moneyfacts.co.uk report savings rates to be particularly poor at the moment, with 90% of easy access savings accounts (among the most popular types of account) paying interest at below 1%. Furthermore, around a third of easy access accounts currently available are paying interest at below the Bank of England’s base rate of 0.25%. Moneyfacts described this as “devastating”.
Moneyfacts finance expert Rachel Springall said: “It is clear to see that savers have been facing a never-ending battle to get a decent return on their cash over the past few years. Government lending initiatives and consecutive cuts to bank base rate have resulted in savings rates plummeting.”
She went on: “To add insult to injury, the governor of the Bank of England’s view is that there will not be a rise to interest rates in the foreseeable future.”
The Bank of England’s policy on a rate rise is rather ambiguous at the moment, with some MPC members recently hinting that a rate rise may be on the cards later this year, after they voted by only a narrow margin of 5-3 at the last meeting to keep the base rate at 0.25%.
The worry now is that the cost of living is going up (at around 2.9% annually), and real household income has fallen for the third consecutive quarter (and by a high amount each time – up to a 1.4% drop in Q1 2017). This, coupled with reduced savings for people to rely on, and ever more debt to repay, looks like a recipe for trouble in the not too distant future.
As a contingency measure, the Bank of England has ordered major commercial banks to set aside a £5.7 billion fund in order to bolster defences in case of widespread defaulting on the various consumer credit instruments active at the moment. That amount is expected to double by the end of the year.