Savings rise as economy reaches a turning point

In another sign that the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />UK economy has reached a turning point in the cycle, economists at the Halifax have issued a forecast that 2008 could see that largest ever rise in the monetary value of savings by UK households. They predict that liquid savings (money that can easily be accessed and turned into cash without the risk of a significant loss of interest) will increase by up to £80 billion next year. The major banks and building societies are already gearing up in a battle royal to attract these extra flows of savings.

Halifax predicts that ‘savings in Individual Savings Accounts (ISAs) are forecast to rise by £30 billion to £240bn in 2008. And total savings will increase by £400 billion to exceed £4.5 trillion by the end of 2008. Total savings, which include the amount invested in equities and pensions schemes as well as deposit based savings, is estimated to be £4.2 trillion at the end of 2007. Total savings will therefore be more than three times the forecast outstanding level of household debt (£1.4 trillion).’ <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> The rebound in savings is, in many ways, the inevitable consequence of a combination of factors. Firstly, millions of households must now look to rebuild their balance sheets after a decade or more of rampant growth in credit card and other borrowing. Secondly, worries about the direct of the economy over the next couple of years reflected in weakening consumer confidence, is causing people to increase their precautionary savings. Concerns about possible falls in property prices and a weakening of stock market values will also drive people to save more. The savings ratio is set to rise but from a very low level, a similar picture can be found in the United States. (The Evan Davis feature on this on the BBC news a few days ago is worth looking at).

In the short term higher savings acts as a leakage from the circular flow of income and spending and could make any economic slowdown in 2008 even worse that is predicted. But in the medium term, the economy does need to rebalance itself and higher personal savings are a means of doing that.

Despite their forecast of a rise in the average propensity to save, economists at the Halifax remain fairly confident about the overall prospects for the economy.