Savings are back, and so is debt. Two reports out yesterday seemed to totally contradict each other.
But there is an underlying truth about savings, which will change the economy in quite profound ways for years to come.
First, here’s the contradiction. According to unbiased.co.uk: “The so called ‘economic optimism’ has led Brits straight back down the debt path.” Apparently, in the first quarter of this year Brits took out more debt than they repaid.
The account of our recklessness continued: “Research reveals the ratio of how much we are borrowing (excluding mortgage debt) contrasted with how much we are saving. In Q1 2009, savings levels hit £14 billion – the lowest level since the research was first commissioned nine years ago. As a nation we are now borrowing 19p for every pound saved. This is in stark comparison to the second half of 2008 which saw consumers fight the recessionary doom and gloom by concentrating on clearing their debts, with £1.76 of debt repaid for every pound saved.”
This is all a little odd, because according to NS&I, the amount the population is saving is higher than ever recorded by its Quarterly Savings Survey. According to NS&I: “On average, Britons are setting aside £92.41 each month, up from £90.12 in winter 2008/09. Those who regularly save are also putting away the largest amounts since the Quarterly Savings Survey began four and a half years ago, £209.23 a month this quarter.”
The NS&I report went on to say: “Driving these record savings levels, Britons are setting themselves the highest savings targets since the Survey began in autumn 2004. People ideally want to save £219.11, up from £210.26 last quarter and £195.67 this time last year. This is 16.20 per cent of their average income, compared to 15.13 per cent in winter and 14.99 per cent in spring 2008. People also appear to be keeping more careful control of their spending with a decrease in the percentage of people saying that they overspent each month, 28 per cent this quarter down from 30 per cent in winter 2008/09 and spring 2008.”
To be honest, it is a little hard to see how Brits can be incurring more debt. Sure, the rate of interest is low, but as we all know, debt is quite hard to come by.
The fall in asset prices has of course made savings more important. We need to find a way of making up for all that loss in the value of our home.
But in the long term, the real issue is the retirement of the baby boomers.
The recent experiences from the property market, and the appalling stock market returns of the last ten years, have taught us there is no easy to way to build up a nest egg for our retirement.
We have just got to save more, plain and simple.
This will surely lead to a surplus of savings in the UK. This will have several important implications.
It will mean an increase in demand for bonds – pushing down on the rate of interest.
For this reason, it seems interest rates are likely to be low for some time.
It may mean a flow of money out of the UK to abroad.
The UK will become more reliant on growing via exporting. UK sectors that are reliant on consumer spending are less likely to do well. In China, and to an extent Germany, the talk is about how we Anglo-Saxons should behave with greater morality with money, and spend within our limits. Well, that is indeed more likely to be the way of things in the UK for many years. The question is, can China and Germany afford a more thrifty British consumer?
If the Anglo-Saxons discover what the Germans and the Chinese call morality, the end result won’t be that good for the Germans or the Chinese.
© Investment & Business News 2013