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Higher headline savings rate in 2009 driven by temporary factors - PwC

Monday 8th March 2010

By Mike Jones

The most striking feature of the UK national accounts data for Q3 2009 was the sharp rise in the household savings ratio to 8.6%, somewhat above its long-term average of around 7.6%. But a more detailed analysis of the figures by economists at PricewaterhouseCoopers LLP (PwC) shows that:

* The sharp rise in this headline savings ratio during the recession was driven mostly by temporary cyclical factors boosting household disposable income such as reduced tax payments, higher social security benefits and low mortgage interest payments rather than significant cutbacks in household spending;
* From the financing side, the higher headline savings ratio was driven mostly by mortgage equity withdrawal turning sharply negative in 2008-9, rather than by large net inflows into bank accounts and other savings instruments;
* Looking ahead, real household disposable income growth looks likely to turn negative in 2010, which is projected to lead to a renewed fall in the headline savings ratio this year despite relatively subdued real consumer spending growth of just 0.75% in 2010;
* Retailers and consumer services providers are therefore likely to continue to experience tough trading conditions over the next year, with consumer spending growth also projected to remain below its long-term trend in 2011.

More specifically, the analysis shows that pre-tax earnings growth was weak in the year to Q3 2009 (-3.1%), but this was offset by a marked cyclical fall in tax and national insurance contributions and a rise in social security benefit payments. So post-tax earnings and benefits actually rose by 2% and this was further enhanced by strong growth in dividend payments and a fall in net interest payments.

As a result, household disposable incomes rose by an exceptionally strong 6.5% in the year to Q3 2009 and it was this that drove the rise in the household savings ratio over this period.

John Hawksworth, head of macroeconomics at PwC, said: "The sharp rise in the headline household savings ratio during the recession flatters to deceive. It is the result of temporary factors boosting disposable income growth in 2009 rather than any sudden outbreak of thrift by UK households.

"But this strength in household disposable incomes is expected to go into reverse in 2010-11 as fiscal and monetary policy gradually tightens while average earnings growth remains subdued. This underpins our view that there is still some considerable way to go for households to adjust their balance sheets and that consumer spending growth is therefore likely to lag behind the recovery in GDP over the next couple of years."

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