Sunday, June 27, 2010

A Nation of Savers

Two pieces of economic news caught by eye recently.

Net Savings increased. Last year, households deposited £24 billion of savings and borrowed £20billion. The first time since records began in 1988 that net savings exceeded net borrowings.

Retail sales fell for the second month in a row. The CBI distributive trades survey showed a balance of -5% of retailers reporting that sales were down year-on-year. That was up from a 14-month low of -18% in May. But, still in negative territory despite a world cup and good summer. July should be better as consumers seek to avoid VAT rise

The rise in savings and gloom over consumer spending is despite record low base rates. Savings increased because of:
  • fears over unemployment
  • Expectations over wage cuts / wage freezes.
  • Banks offering saving rates far above the Bank of England base rate.
Given fiscal austerity of the government, uncertainty over house prices and lower confidence by consumers, the trend to greater savings than borrowings may continue.

On the one hand, greater savings is beneficial. In the boom period of the early naughties, households were overextending themselves, running down savings and borrowing on credit. The fact householders are paying down debt is good in the sense that when interest rates rise it will be less of a burden, and the economy will be more balanced in the long term.

However, we should not forget the paradox of thrift' - the situation where individual decisions to save lead to lower overall demand in the economy.

If we have a double austerity - saving by households and spending cuts by government, the chance for a double dip recession increases.

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