From the TUC

The most important graph for the UK economy?

16 Apr 2013, by Guest in Economics

I’ve argued before that if I was forced to choose just one graph to understand the UK economy over the last two and half decades, the one I’d go for is the household savings ratio.

Annoted savings graph

I’ve marked the three stages of the UK economy since 1992. The ‘great moderation’ of unbroken growth from 1992 to 2008 – characterised by a falling savings ratio, the sharp recession of 2008/09 – with a rapidly rising savings ratio and the virtual stagnation of 2010-2012 -complete with flat-ish savings ratio.

In the absence of either strong growth in household incomes (which looks unlikely at the moment) or extremely rapid rebalancing towards investment and net trade (also looking unlikely at the moment) then this chart will almost certainly continue to be one of the most important indicators for the UK economy.

If the household savings ratio remains broadly flat then so will the economy, if if suddenly rises again then renewed recession is likely and if it starts to drift downwards then household spending will rise quicker than household incomes providing a boost to growth.

I don’t think I’m the only one who has noticed this. It is hard to read current Treasury policy on the housing market as anything other than an attempt to drive down down the household savings ratio by encouraging more mortgage borrowing. Rebalancing, as I noted after the budget, has been all but abandoned.

Last week’s forecasts from the Item Club confirmed this. The International Business Times noted that rebalancing is ‘on hold’ whilst the “government’s influence on the housing market could spike consumer spending and engender a faster recovery than many UK businesses are currently anticipating”.

The question then becomes – are policies that drive down the household savings ratio desirable? And here I think the answer is far from clear. Of course faster consumer spending would provide a boost to GDP in the short to medium term but in the longer term is rising household debt not one of the key factors behind the mess we are now in?

In the long run a recovery will only be sustainable if it is build on the solid foundations of rising household incomes. Sadly that doesn’t look to be happening anytime soon.


3 Responses to The most important graph for the UK economy?

  1. Jayarava
    Apr 16th 2013, 1:48 pm

    Yep striking. What about also plotting the budget deficit on the same graph? I used the recent ONS figures to show Govt and non-govt debt/surplus recently. When private sector saves the govt must borrow.

    Alongside the savings household debt still hovers around 100% of GDP. Indeed the 2013 Budget Report seemed to show that deleveraging simply stopped in 2012 – private sector debt stayed steady at 440% of GDP.

    Interesting that the beginning of great moderation dates from Major Government – not exactly Brown’s economic miracle, just a continuation of neoclassical influenced policy!

  2. Tax Research UK » The UK’s population is going to reach an end to its tolerance of imposed oppression. The question is when, not if
    Apr 17th 2013, 7:15 am

    […] As Duncan Weldon notes this morning, UK householders are not spending, and he provides this graph to prove it: […]

  3. al fearnes
    Apr 18th 2013, 11:16 pm

    I am sure there is a brain in there but it can’t do joined up. This is not a 20 year thing, the error goes back to the 1970s, when a few feeble minded economists got together with some rich bankers, found themselves a stooge called Thatcher and Reagan who would champion a version of economics that relied solely upon the generation and transfer of cash. This gave the boom of the 1980s, followed by an almighty crash. Then they invented derivative markets (the name tells you how dodgy they were) and other junk bond markets (yes, they really did get away with such blatant corruption); this, with government backing to manage and audit themselves, left the finance institutions to steal at will.
    Poor little house market and savers have pennies, 90% of the global finance market is on the stock exchanges, no in the savings of householders. When the banks crashed because they couldn’t pay off their own twisted debts to each other, the governments game them OUR cash, while we still had to repay the fraudulent debts they had saddled us with. The banks get paid twice. As each debt falls due and we can’t pay it, the banks go back to the government and take another subsidy. This is why they are getting richer while nobody else does.
    The government is trying to drive up the housing market because the banks use real estate as a no risk no cost way of inflating their balances and the UK economy only does real estate, it has priced itself out of manufacturing (everyone in the UK pays £7000 per year in real estate overheads)
    If this doesn’t make sense, go read a book and try again.