Britain’s recovery is threatened by the growing savings glut
Saving for a rainy day may seem prudent but can do an awful lot of damage when embraced by all at once
Coiled spring or permanently rusted up old engine? Britain’s – and Europe’s – hopes for economic recovery are threatened by a toxic mix of poor productivity and high rates of saving. Inability to spend as freely as we would have liked for the past year, together with high levels of uncertainty about the future trajectory of the economy, has left both household and corporate balance sheets overflowing with excess deposits.
Persuading companies and consumers to disgorge at least some of these monies is key to the rapid bounce back in the economy anticipated by the likes of Andy Haldane, the Bank of England’s chief economist. His depiction of the UK economy as a “coiled spring”, just waiting to be released, doesn’t work if this excess has become permanently and uselessly frozen in bank and savings accounts. Haldane’s hopes rely crucially on a wall of pent-up demand progressively breaking free as Covid restrictions are lifted.Advertisement : 8 sec
The Bank of England estimates that with the savings rate as high as 26.5pc of disposable income at one stage last year, households accumulated an excess stock of savings of around £125bn between March and November, a number which is bound to have risen further still since then with the imposition of a third national lockdown.
The same level of accumulation has been broadly mirrored in the corporate sector, the Bank estimates. That’s a lot of money that could potentially flow back into demand once everyone is confident enough in the success of the vaccine programme to start acting normally again.
Only one problem; these savings are not evenly distributed. Among households they are disproportionately skewed to higher income earners and retirees.
Much the same can be said of the corporate sector; companies that have survived the pandemic well will be flush with cash, but others, particularly in hospitality and other sectors forcibly closed by lockdown, will have barely two pennies to rub together.
The upshot is that those most likely to have saved the most are also those least likely to spend or invest it productively. Survey evidence seems to support this observation. Most respondents say they plan to keep at least some part of their excess. A permanently higher savings rate may have established itself.
If that turns out to be true, it feeds into the wider debate about growing wealth inequality and secular stagnation.
The economy at large is going to be in some trouble if the better off cannot be persuaded to spend their money, or otherwise invest it in productive activity, but instead simply leave it fallow in seemingly ever-rising asset prices. Poor levels of business investment, innovation and productivity growth would become embedded. And the bubble in asset prices would expand even further.
Instinctively, most of us are against negative interest rates, but you can see the logic. It is very difficult in practice to charge a negative rate on retail deposits; physical cash provides some kind of alternative. But for big, corporate depositors, that’s not an option.
Experience in Denmark, whose central bank was the first to impose a negative bank rate, suggests the threat of confiscation can be persuasive in forcing companies to invest their cash rather than hoard it. That debate has yet to play out within the Bank of England’s Monetary Policy Committee, but at least three of its members seem partially to have bought the arguments in favour of negative rates.
As David Owen of the investment bank Jefferies has argued it may be more important to get the corporate sector spending its surplus than householders. The estimated excess of £125bn is only 10pc of annual household spending, but around 50pc of business investment. Ergo, you get a much bigger relative effect if corporates disgorge the money than households.
That said, fiscal levers are always going to be preferable to monetary manipulation in spurring the hoped-for handover from public to private sources of demand. Negative rates are not going to persuade people and companies to spend and invest what they don’t already have but targeted tax cuts or even Biden-style handouts just might.
It is also possible to envisage any number of “use it or lose it” measures that could be applied to corporate cash hoarders. That’s why it is so important that Chancellor Rishi Sunak does not make the mistake of reining in the public finances too soon in next week’s Budget with much-rumoured “down payments” on fiscal consolidation, such as a hike in corporation tax. Not until households and firms are spending freely again can he afford to apply the brakes.
Keynes called it the “paradox of thrift”. What may seem a worthy, even admirable, characteristic on an individual level – that of saving for a rainy day – can do an awful lot of damage when households, companies and the state all decide to do it en masse.
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