Household savings hit a record high over lockdown, as millions of people stuck at home were forced to cut down on their spending.
The Office of National Statistics reported yesterday that since March, 29% of the average household’s disposable income had been poured into savings.
Compared to the same time last year, this means that, on average, households are saving more than three times as much as they usually would.
The household savings ratio shows the percentage of each household’s disposable income (income after tax), which gets saved.
This dramatic increase mirrors the fall in household consumption, which has, predictably, been a feature of lockdown life.
Over the same period, household consumption plummeted by 24%, which can mostly be accounted for by savings on social activities: restaurants, cafes, and recreation and culture.
Analyst at AJ Bell urged those lucky enough to have made unexpected savings to spend them wisely:
With lockdown strangling the ability of Brits to spend and the Government’s furlough support scheme working to protect jobs and wages, it was inevitable those people lucky enough to remain employed would save more as a result. For those who are in this position, it is vital they use this opportunity to pay off any high-cost debts and build up a decent cash buffer if they haven’t already done so. While cash savings rates may be low, it is still worth shopping around to get the best deal possible. A cash buffer could provide a critical safety net against future uncertainty, with job cuts likely to spike as the new, less generous Job Support Scheme replaces the furlough scheme from the start of November.
Meanwhile, the ONS data only tells part of the story. Figures released in July by the Bank of England and Ipsos Mori showed that by mid-July, households with a higher pre-pandemic income had been able to save much more than those earning less overall.
On average, the wealthiest 20% of households were able to save an average of £320 per week. Unsurprisingly, the cost of these savings came from social activities, such as holidays and hotels, followed by travel, eating out, and personal goods such as clothes and beauty products.
Meanwhile, households whose income is in the bottom fifth save around seven times less, with travel and transport as the leading source of just £48 saved per week, on average.
Households in the lower-income brackets are also less likely to have actually been able to “save” that money, because they are more likely to have suffered job losses, reported The Bank.
Trends on individual bank balances add even more color to the picture. People with a salary of more than £55,000 per year were the group most likely to have increased their banked savings over lockdown, while anyone on a salary of less than £35,000 was more likely to have less money in savings than they at the start of the year.
Across all income brackets, self-employed people have relied the most on their savings over lockdown, and at the end of June had an average of 30% less than they did at the start of the pandemic.
Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee, said:
Spending on staples – food and drink, utilities – which make up about half of UK consumption, has not risen enough to offset those falls. So overall, consumption spending has fallen substantially.
At the same time, relative to the declines in consumer spending, incomes have been somewhat maintained, either through working from home or through the government’s wage subsidy scheme for those who have been furloughed.
So one peculiarity of the Covid-19 downturn is the prevalence of “forced” or “involuntary” savings, with marked differences across the income distribution.”
Around 70% of the UK economy is derived from consumer spending.