UK household savings rise sharply, fuelling rebound optimism


The UK household saving ratio rose to a near record high in the final quarter of last year, fuelling hopes that the extra cash will help boost economic growth when businesses reopen.

The ratio, the average percentage of disposable income that is saved, rose to 16.1 per cent in the final quarter, data from the Office for National Statistics showed on Wednesday

This is up from the 14.3 per cent in the previous three months and the second highest ratio since records began in 1963 — just behind the second quarter of 2020.

Savings rose due to limited spending opportunities because of the shutdowns across hospitality, retail and travel, while incomes were largely protected by government support, particularly the job retention scheme.

Separate figures from the Bank of England published on Monday showed that households increased their bank savings at the start of the year as more businesses shut. 

Households added an additional £17.1bn of bank deposits in February, according to the central bank. This was well above the monthly average of £4.6bn in 2019 and it was even above the monthly average of £15bn since March 2020.

Household savings “is expected to be the main driver of the consumer expansion” forecast in the latter half of this year said James Sproule, chief economist of Handelsbanken in the UK.

The cash pile accumulated by households “paves the way for a rapid rebound in 2021”. said Ruth Gregory, senior UK economist at consultancy Capital Economics.

Together with the accelerated rollout of vaccines, “the UK economy likely will recover at a faster rate than the eurozone’s this year”, said Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics.

The ONS also revised its growth estimates throughout 2020 and calculated that the UK economy grew more than previously thought in the second half of last year.

UK output expanded 1.3 per cent in the final three months of 2020 compared with the previous three months, an upward revision from 1 per cent, leaving the country with a smaller output gap compared with pre-pandemic levels.

Growth in the third quarter was revised up to 16.9 per cent, 0.8 of a percentage point stronger than previously estimated, but output in the second quarter was calculated to have fallen 0.5 of a percentage point more than previously thought, at 19.5 per cent.

Jonathan Athow, the ONS’s deputy national statistician for economic statistics, said: “Our revised quarterly figures show the economy shrank a little more than previously estimated in the initial stages of the pandemic, before recovering slightly more strongly in the second half of last year.”

The stronger than previously thought gross domestic product growth in the final quarter of 2020 reflects an upwardly revised 6.7 per cent expansion in government consumption, following spending for the test and trace scheme and increases in activity for other healthcare services.

The ONS also revised upward growth in business investment and said there was “widespread evidence” of businesses stockpiling in preparation for the end of the UK’s post-Brexit transition period at the end of December. The revised inventories data showed an increase of £1.5bn in stocks being held by UK companies in the final quarter of the year, mainly finished manufactured goods.

Column chart of Annual % change showing UK GDP fall in 2020 was the largest since ONS records began

With the revisions, the UK economy was estimated to have contracted 9.8 per cent in 2020, only marginally better than the 9.9 per cent of initial estimates.

This is still the largest contraction since ONS records began in 1949 and the biggest drop in more than 300 years, according to GDP reconstruction by the Bank of England.

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