Households saved just 1.1% of their disposable income in Q1, the lowest rate since 1959. This has prompted the usual fears that consumers will have to rein back their spending eventually.
Such fears tell us more about the ideology of the commentariat than about the economy. It believes the public are just feckless idiots who need rescuing from their own recklessness.
But there’s another more mundane explanation for low savings.
The figures (tables A7 and A38 of this pdf) show that there were several shocks to income and spending in Q1.
Taxes rose by £1.6bn and income from interest, rent and dividends fell by £1.3bn (seasonally adjusted). Together, these factors took 1.3% off disposable income. And thanks to higher oil prices, spending on transport rose 3.7%; this alone accounts for a quarter of the rise in nominal spending in Q1.
What’s going on here is people reduced their savings as, variously, City folk have paid taxes on their bonuses, rentiers got lower interest and rental income, and most of us have paid higher petrol prices.
And this is just what economic theory says we should do - we change our savings in the face of shocks, so as to stabilize real spending. Consumers are telling us that Q1 saw a number of temporary factors that justify a temporary run-down in savings, not a major change in our lifestyle.
Was this judgment right? We can’t know for sure: it takes some arrogance to bet against the wisdom of crowds unless you have pressing reasons to do so. But what we do know is that consumers have not seen any reason to retrench yet. After all, spending boomed in May.
Recessions are hardly ever (never?) caused by autonomous changes in consumer savings. Find something else to worry about.
Such fears tell us more about the ideology of the commentariat than about the economy. It believes the public are just feckless idiots who need rescuing from their own recklessness.
But there’s another more mundane explanation for low savings.
The figures (tables A7 and A38 of this pdf) show that there were several shocks to income and spending in Q1.
Taxes rose by £1.6bn and income from interest, rent and dividends fell by £1.3bn (seasonally adjusted). Together, these factors took 1.3% off disposable income. And thanks to higher oil prices, spending on transport rose 3.7%; this alone accounts for a quarter of the rise in nominal spending in Q1.
What’s going on here is people reduced their savings as, variously, City folk have paid taxes on their bonuses, rentiers got lower interest and rental income, and most of us have paid higher petrol prices.
And this is just what economic theory says we should do - we change our savings in the face of shocks, so as to stabilize real spending. Consumers are telling us that Q1 saw a number of temporary factors that justify a temporary run-down in savings, not a major change in our lifestyle.
Was this judgment right? We can’t know for sure: it takes some arrogance to bet against the wisdom of crowds unless you have pressing reasons to do so. But what we do know is that consumers have not seen any reason to retrench yet. After all, spending boomed in May.
Recessions are hardly ever (never?) caused by autonomous changes in consumer savings. Find something else to worry about.
> After all, spending boomed in May.
Did it?
I've still never got my head around why the ONS measures sales volumes (in like for like goods) rather than sales value.
Year 1: Buy 1 tin of baked beans, and one joint of beef.
Year 2: Buy 3 tins of baked beans...
... that's (overall) about a 50% growth in retail as per the ONS, but I suspect about a 70% fall the way any other G8 country would report it.
Posted by: Mark Harrison | June 27, 2008 at 01:50 PM
It did according to the British Retail Council, who might be expected to know about that sort of thing. And ONS measures volumes *and* values AIUI...
Posted by: john b | June 27, 2008 at 02:04 PM
The ONS measure the value of sales first, and then subtract price changes to derive volumes. So if we traded down from beef to beans with unchanged prices, spending would fall, and this would show up as a fall in volumes, as well as value.
Posted by: chris | June 27, 2008 at 02:09 PM
My grasp of economics seems to get shakier by the day and this all seems correct, but...
I thought the banks were suffering from capital problems which a reduction in deposits would exacerbate? If this is nonsense could someone explain why,
yours confused
Posted by: councilhousetory | June 27, 2008 at 02:25 PM
Good article on wisdom of crowds (why it fails)...
http://www.leggmason.com/individualinvestors/documents/insights/D3295-ExplainingWisdom.pdf
One only has to look at the Efficients Markets Hypothesis (you cant beat the market as current prices reflect all information) to realise how absurd the concept is in extreme. Consider a contemporary example.. Barratt's shares are down 93% year to date... was the crowd wise? Was this predictable?
As for low savings rate, this is much more than a first quarter issue... savings have been shrinking for many reasons and clearly savings rates anywhere in the low single digits is woefully low and unlikely to deliver what most people expect in the future.
Posted by: Jonathan | June 27, 2008 at 02:51 PM
It's all smoke and mirrors.
If you net off all mortgage debts and cash deposits, you get a big fat nil. The flipside of a credit bubble is a 'deposit bubble' (usually in tandem with an asset price bubble).
The overall savings rate is always close to nil, as some people spend more than they earn and vice versa. You start off with nothing and end up with nothing.
The only sensible measure is the overall earnings level in the economy.
'Wealth' in itself is only the NPV of earnings derived from assets with scarcity/monopoly value + speculative value which is of course of no real value at all as it is not represented by future income that the underlying 'asset' can generate.
What Councilhousetory alludes to is the fact that banks have an asset side (money they have lent to home-buyers) and a liability side (cash on deposit and shareholders' funds). The assets have fallen in value (defaults, falling security values) and so all the banks are doing with these rights issues is converting cash deposits into new share capital. This is how they are going to deflate the 'deposit bubble'.
http://markwadsworth.blogspot.com/2008/04/uk-banking-crisis-in-perspective.html
Here endeth today's lesson.
Posted by: Mark Wadsworth | June 27, 2008 at 02:54 PM
Spending boomed but this was on credit and had zero to do with savings, Chris.
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