Blog
A negative savings ratio - the first since 1958!
1st October 2008
Much has been written about the financial squeeze facing millions of households in the UK. Disposable income has come under pressure from rising utility and food bills and an increase in the overall burden of tax. Just how steep this squeeze has been is shown by revised figures from the Statistics Commission on the household savings ratio – the percentage of disposable income that is saved rather than spent.
The household saving ratio was 0.4 per cent between April and May compared with -1.1 per cent in the first three months of 2008. This was the first instance of a negative saving ratio since the fourth quarter of 1958.
A negative savings ratio means that people were dipping in their savings to pay for regular and unavoidable items of spending. And with personal savings under threat the worry will be that a broadly based downturn will leave consumers exposed with less of a cushion of savings to fall back on.
The savings ratio needs to increase, but if we all rein back on our spending at the same time and on a sizeable scale, this will have a dramatic effect on the level of consumer spending within the circular flow. Recession would be inevitable.
Consumer spending dipped 0.1% in the second quarter. It is rare for household consumption to fall - it is yet more eivdence that the economy is already in recession territory even if the official statistics make us wait several more months for confirmation.
In a related move the government is under pressure to raise the guarantee on bank deposits to £50,000 per investor per institution. The Irish government has taken the unusual step of guaranteeing all savings deposits in six leading banks for the next two years. In the United States the Senate is likely to vote for an expansion of the deposit insurance programme as part of a deal to vote through a revised financial resuce act.
And here is the chart for the savings ratio in a long term perspective:
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.