Families built up £100billion of ‘excess savings’ in lockdown and are already spending it, a senior Bank of England official has claimed.
A nationwide spending spree could help the economy to recover more quickly than forecasters have predicted, the Bank’s chief economist Andy Haldane said.
In an exclusive interview with the Mail, Mr Haldane said there is huge ‘pent-up demand’ following the Covid lockdowns.
As Christmas shoppers flocked back to high streets after restrictions were loosened last week, the economist said ‘consumer spending has come back at real pace’, adding: ‘Households have shown unbelievable resilience.’
A nationwide spending spree could help the economy to recover more quickly than forecasters have predicted, the Bank of England’s chief economist Andy Haldane said
He said that when restaurants, pubs and non-essential shops were closed, many people spent more on other things instead.
‘People have shown their willingness to [be flexible] where they spend and how they spend. They are not going to the pubs and restaurants, but they have switched to takeaways and patio heaters.’
Mr Haldane said that between April and June, the Office for National Statistics’ savings ratio – which measures how much of our disposable incomes were set aside – rose to 29 per cent.
The equivalent figure was just 6.8 per cent for that period last year. The new ratio is more than twice as high as the previous record of 14.4 per cent, set some 27 years ago.
Mr Haldane admitted the new figure has not been ‘evenly-balanced’ across society. ‘Nonetheless it did mean there is a pool of excess savings – excess because they weren’t planned.
Christmas shoppers have flocked back to high streets after restrictions were loosened last week
‘As people’s incomes held up and spending was restrained, they have amassed around £100billion of excess savings.’
Mr Haldane has previously said good news should not be drowned out by gloomier statistics because fear is, like Covid, contagious. In autumn he warned against ‘the economics of Chicken Licken’, referring to the folk tale about a forecasting fowl who wrongly thought the sky was falling down.
He has also stressed that confidence can spread just as quickly as panic. As the Pfizer vaccine arrives in Britain, the jab could deliver a huge psychological boost to customers and businesses who had been reluctant to spend or invest.
While some are already spending some of their excess cash, much more remains in accounts across the country. ‘People are using their involuntarily-accumulated savings on a new house or a new car,’ Mr Haldane said. ‘[But] plenty of that pent-up demand is still in the tank… there are plenty of those savings still to be used.’
He believes that many will be keen to get back to pubs and restaurants following enforced closures. ‘Some of this spending is lost and gone forever, especially on socialising,’ he admitted.
Topshop owner Arcadia went into administration last week, while Debenhams has called in liquidators
‘You are not going to go to the pub twice as much when they’re open again, but there will be some catch-up in social spending. There is plenty of scope there for the vaccine to release more of that pent-up demand.’
The £100billion treasure chest is concentrated among the better-off, who carried on receiving most of their incomes during lockdown but saw their spending plunge.
Many middle-class professionals have been able to work from home – meaning no commuting costs. In addition, they have been unable to spend cash on the typical luxuries such as new clothes or holidays.
Those lower down the income scale have not saved as much, if anything. Many have lost their jobs or become much worse off due to Covid-19 because their working hours have been slashed.
Figures from the Institute for Fiscal Studies show that middle-class families had, on average, an additional £350 a month sitting in their bank accounts between March and September.
The poorest households were typically £170 a month worse-off.
However, there remains a vast pile of cash waiting to be spent by the army of accidental savers. This can deliver a major boost to the nation’s prosperity, which has been battered by the coronavirus. It could also see the economy recover much more robustly, rather than leaving it in the doldrums as had been feared.
A surge in spending may not be enough to save beleaguered high street chains, as shoppers are increasingly buying online. The pandemic has already proved the final straw for some.
Topshop owner Arcadia went into administration last week, while Debenhams has called in liquidators. But despite these casualties, the £100billion in savings can still provide a significant boost for Britain – as consumer spending accounts for around 70 per cent of the national economy.
Plenty of challenges remain. Many forecasters – including the Bank of England – expect national income to be down by more than 10 per cent this year. The Bank also expects unemployment to rise to 7.75 per cent – the equivalent of 2.65million people on the dole.
Nevertheless, Mr Haldane and others are increasingly hopeful of a rapid revival. He also believes the pandemic could actually help to end the poor productivity which has dogged the UK economy for a decade. The need to work from home has forced firms to invest in technology and train workers in digital skills which can lead to innovation and growth.
Those who do lose their jobs might find it easier to get a new one when compared with previous recessions. This would also lower the risk of becoming unemployed long-term.
Retail and hospitality workers are some of the worst-hit by the current turmoil. Typically young, and more likely to be women, they often have skills they can transfer to other lines of work.
When restaurants, pubs and non-essential shops were closed, many people spent more on other things instead
By contrast, those who lost out in the 1970s and 1980s were middle-aged men in specialised industries who found it difficult to find their next job. Despite this, many economists had remained pessimistic about the UK’s prospects due to its handling of the pandemic and worries over Brexit.
However, last week saw Goldman Sachs upgrade its forecasts for Britain, predicting a GDP rebound of 7 per cent next year.
Doug McWilliams, of the Centre for Economics and Business Research, said: ‘Our analysis has shown there are billions of unspent savings… if some of this pile of money is spent it will be a big positive for the economy.’
Laith Khalaf, an analyst at stockbroker AJ Bell, agreed, saying: ‘There’s an awful lot of dry powder sitting in people’s bank accounts which could spark an explosive economic recovery.’
Hedge fund economist Dr Savvas Savouri said he was taking ‘a stand’ against dire predictions from the Treasury’s independent watchdog, the Office for Budget Responsibility.
He claimed ‘enforced’ savings would be released like ‘a coiled spring’ – but the impact has not been included in OBR forecasts. ‘We must not underestimate just how much pent-up demand there is within the UK,’ he said.