If you had read the ‘Sunday Times’ this weekend you could be forgiven for believing the UK is at last on the mend. The good old days are set to return. No more bust; lots more boom. Except –

Well, before we get to the ‘except’ part, let’s remind ourselves of the news that one just has to accept is good.

Employment hit its highest level ever in the three months to August, says the Office of National Statistics, and unemployment fell to 7.8 per cent during the same period, which is the lowest level since spring time 2011. Inflation is falling too, with the CPI rate going down from 2.5 per cent in August, to 2.2 per cent in September. Okay, with averages wages in the year to August rising by 1.7 per cent, the average worker was worse off, but the gap between inflation measured by this index and rising wages was the smallest since April 2010. And finally, if that isn’t enough good news for one day, other data out last week revealed a good month for the High Street, with retail sales rising by 0.6 per cent in September on the month before. Apparently, total sales were at their joint highest ever in the month.

Except…

There are several problems, but here is the big one – at least it’s a theory, and it’s a view not recognised by economists.

Saving is the new black. Saving has become fashionable. During the boom getting into debt was seen by some as a form of machismo, but now saving is the all the rage. That is partly why interest rates are so low. The Bank of England reckons we are saving too much, so its cuts rates in order to encourage less saving and more borrowing.

There are several reasons for this rise in the popularity of savings. During the 1990s we enjoyed money for nothing as stock markets boomed. Modest savings put into a pension fund rose at a pace that was completely off the charts in comparison with rising output. Who needed to save much, when most of us appeared to be guaranteed a prosperous retirement regardless?

The stock markets crashed, and the FTSE 100 peaked on December 30 1999, and it still languishes around 1,000 points below that level. But then house prices surged. Who needs to save when year in, year out our homes rise in value at a rate almost as high as our annual salary?

The retirement of the baby boomers always was a problem in the making, but the snag is that we had a finance crisis before this generation got around to retiring, making a bad problem a good deal more serious.

In 2008, many economists were missing the possibility that saving rates may start to rise. They are missing it again.

In Q2 this year income per household rose by an average of £69 (after allowing for inflation), yet spending fell. Why? Because the extra money was saved, lifting the savings ratio from 6.0 per cent in Q1 to 6.7 per cent. Some economists say that as inflation falls below increases in average wages, spending will start to increase, which will lift the UK out of recession into sustainable growth.  Maybe, but it is equally possible the difference will just be saved as panicking baby boomers fret about how they will fund their old age.

What is the solution? There are limited answers, but one is for the government to take the money UK individuals are so keen to lend to it, and use it to fund investment in public infrastructure and, even more importantly, in providing funding for budding entrepreneurs.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here 

© Investment & Business News 2013