One of the few positives from the last year is that during lockdown, household savings balances have gone through the roof. Having been more or less flat for years, dipping only in periods of economic stress such as recessions, 2020 and 2021 saw them rise to levels previously unseen. Forced saving has bolstered many people’s bank accounts by an amount that is reckoned to be around £180bn.
Back in June 2020, the evidence was clear from the Bank of England’s monthly money and credit statistical releases that something remarkable had been underway ever since lockdown began at the end of March.
Yes, people were losing their jobs. Yes, certain sectors of the economy and the workforce were suffering from lockdown - anything to do with hospitality, non-essential retail, and aviation, for instance, was having a torrid time of it.
But lots of people didn’t lose their jobs, and their incomes didn’t suffer during the lockdown. On the contrary, their actual disposable incomes actually rose, as spending opportunities diminished. Plus, lockdown living proved cheaper for many: no commuting costs, no costs from socialising, no visits to the gym and so on. The household savings ratio grew, and so did people’s bank balances: month after month, household bank savings climbed by an average of £15bn a month.
Something else happened, too. Many consumers didn’t just build savings, they also repaid consumer debt - personal loans, car loans, credit card accounts. Overall, some £17bn was paid off during 2020, with more being repaid since, during the lockdown that began in early January. And while mortgage repayments don’t show up in the Bank of England data, it is most likely that many households also took the opportunity to reduce their mortgage balances too, despite mortgage rates being at what are still historic lows.
All of which means that many Britons will be feeling flush with cash as lockdown restrictions are being lifted and leisure activities begin to open again. They’ve got bulging bank accounts, and far fewer consumer debt obligations than they had prior to March 2020. Put another way, their disposable incomes have had a double boost: extra cash, and fewer outgoings.
And economists want to know what people intend to do with that money. Because, with GDP having contracted by 9.8% in 2020 (the biggest fall in over 300 years) the economy needs a boost if it is return to anything like its long-term trend.
And as boosts go, that £180bn will do nicely. Millions of consumers, flush with cash and with fewer monthly outgoings, ready to shop until they drop, and then head to the nearest pub or restaurant before heading home to book a holiday. Certainly, that is what economic theory predicts.
But will it actually happen? Economists are divided. Ordinarily, most would say ‘yes’. But these are not ordinary times, and while people have saved huge sums, it has been involuntary, through forced saving, for which there are few precedents. And for many consumers they have developed new habits; whether that is wanting to save more, or not spending on previous expenses that they now realise they can go without.
Another complicating factor is that much of the saving has been undertaken by consumers at the wealthier end of the spectrum, as the younger and poorer elements of society suffered disproportionately from lockdown. And these wealthier consumers tend to have a lower propensity to spend, and a higher propensity to save and invest. So while the jury is out, it is expected that a reasonable chunk of that £180bn will indeed find itself being spent, bolstering GDP.