Household Savings Rate Reached Record Lows In 2018

  • Apr 26, 2019 BST
  • Team Kalkine
Household Savings Rate Reached Record Lows In 2018

Rarely has Britain been consuming so much and saving so little: recent trends have shown that the nation had to borrow or run down its savings to finance their spending and investment. According to latest data by Office for National Statistics (ONS) for 2018, this was equivalent to 1.6% of gross domestic product (GDP) for government, 2.0% for corporations and 1.0% for households. This bleak picture indicates that to finance these net borrowing positions of UK households, companies and the government, the rest of the world continues to be a net lender to the UK. Since the 2016 EU referendum, a deficit has been experienced by every large sector of the economy at the same time; this scenario was last experienced in the late 1980s, during the book years.

For long, many British policymakers have expressed concerns that operating an economy on such low rate of national savings portends trouble for the future. However, no solution has still been found to solve it. Mervyn King, former governor of the Bank of England, had noted that those countries most in need of higher savings level have been the most active in pursuing the short-term stimulus, like the one undertaken by the Bank of England for fear of a slump. In its most recent release, ONS issued a stern warning over the lack of national savings. Rob Kent-Smith, head of GDP at the ONS, last month said that for an unprecedented nine quarters in a row, households spent more than they earned.

However, many economists are not as worried as many believe that the problem would not be found in the aggregate number, though low national savings rates might be a flashing warning light. According to David Miles of Imperial College London and former MPC member, people should estimate whether companies are investing sufficiently for their long-term prospects and households are saving enough for their future needs. Issues in the measurement of individual sectors can also be seen; for example, according to the latest report by ONS, the current level of government borrowing is at its lowest level since the early years of the millennium. In the household’s sector, much of low levels of savings can be attributed to a sharp rise in investments in new homes, which adds up to the valuable assets held by the households and forms as a part of savings.

The country's net investment position since the financial crisis has also taken a drastic turn. Earlier net investment position was positive, but now it is persistently negative. In a future, a weak balance sheet, which signals vulnerability and spells trouble, is expected to continue as the country's dependence on external finance will continue to grow and it’s stock of external liabilities will increase.

Policymakers should remain concerned about the linkage between reduced economic growth and a lower saving rate as literature on the topic suggest savings and incomes have a strong positive relationship, with a potential to adversely affect future economic growth potentiality. This might also lead to lower living standards in future and set a vicious cycle in motion.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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