It is difficult to work out whether this is good or bad news. The UK’s savings ratio rose from just 1.7 to 4.8 per cent in the final quarter of last year, according to the latest official data out last Friday.
Meanwhile, in the US, the savings ratio fell slightly in February. But even so, there has been a remarkable turnaround. Six months ago, the US savings ratio stood at zero. In February it was 4.2 per cent.
Never has one statistic so well summed up the real challenge of the economy.
Just over a year ago, Martin Weale, the Director of the National Institute of Economic and Social Research warned that the UK had a savings shortfall of around £1.4 trillion. He said: “In France, Spain and Italy wealth and saving are close to adequate. Consumption needs to fall no more than 2 per cent in France, Italy and Spain. But the United Kingdom has a long history of low saving and needs to cut consumption by 8.5 per cent if today’s adults are to avoid imposing a burden on future generations.”
He added: “Working five years longer removes the affordability problem faced by current adults in the UK. But the youngest group of the population would still find that they need to cut their consumption by just over 3 per cent from current levels.”
The key factor that lay behind the UK’s low savings ratio must surely have been the rise in house prices seen earlier this decade. People reasoned that, since their home was soaring in value, they didn’t need to save so much. It seems many home-owners saw their home, or their buy-to-let portfolio, as their pension.
But there is no productivity in rising house prices. The first of the baby boomers will be reaching 65 shortly. By the middle of this decade, there will be more people reaching 65, than indigenous members of the population entering the workforce for the first time. In order for goods and services to be supplied to those who are retired, those who are working need to produce them. If instead, retiring baby boomers tapped into the spare equity in their homes, the result would be that with demand exceeding supply, inflation would go up, and the real value of savings would then be eroded.
Maybe crashing house prices have made that point academic.
But the challenge still hasn’t gone away.
If we all start saving more, and start putting more away for our retirement, then the result will be less consumer demand in the economy, leading to a likely rise in unemployment. One thing that is for sure, if you are made unemployed, it is difficult to save.
This is a massive challenge. How do the baby boomers meet the need of saving for their retirement, without causing years of economic crisis in the first place?
It is possible that this was the true underlying cause of Japan’s 20 years of economic wilderness. In Japan, the demographic shift is further advanced than in Europe
Much depends on how the money saved is used by the recipients of the saving. If savings are used to invest in new technology, or in entrepreneurial businesses, then the long-term effect will be a richer country. If the savings are piled into property, then it will be as if money had been poured down the drain.
© Investment & Business News 2013