Sluggish Savings Rate Could Complicate a UK Recession



Consumer spending has provided a consistent boost to the economy during Brexit negotiations. The economic turmoil many predicted following the historic referendum vote to leave the European Union was mitigated, in part, by strong household spending. Consumer’s continued willingness to spend money has surprised analysts, prompting warnings about debt.

As the country approaches a potentially sticky Brexit transition, perhaps with no formal deal in place to guide the changeover, another warning has come to light, foretelling probable complications, should the country fall into recession.

Savings Rate Concerns

Savings rate measures the amount of money households keep in reserve. The figure is important because personal savings are a first line of defense against unexpected financial pressure – you can always count on your nest egg when spending spikes.

Short-term loans provide another financial safety net, furnishing fast cash for urgent spending demands. The flexible financing presents a quick alternative to conventional loans, enabling workers to qualify for small loans online, without waiting for extensive credit checks.

The savings rate in the UK, identifying exactly how much of their disposable income makes it to consumers’ savings account, currently stands at historically low levels. The condition causes worry, because the rapid onset of recessionary conditions – perhaps in the wake of a no-deal Brexit, could result in a prolonged period of recession. Without the means to drive a timely recovery, cash-strapped households may not be able to right the ship, in recessionary waters.

Britons are Borrowers

In addition to sluggish savings rates, recent figures indicate UK consumers have been net borrowers for a stretch spanning ten quarters in a row. The trend marks the longest net borrowing streak since economic analysts began tracking the metric and keeping records. In the event of economic recession, it is thought households’ lack of financial wherewithal could substantially prolong the recovery period.

The source of pressure fueling a recession, whether from home or abroad is less important than the potential for a “stuck” recovery. Unfortunately, the country’s economy is particularly vulnerable to global forces, leading up to a yet-uncertain departure from the EU. Even if the economy remains strong at home, global impacts could nudge the economy towards recession, leaving Britons unprepared to sustain a speedy recovery.

At least one Bank of England policymaker has weighed-in with concerns about the potential for a lengthy recession, and officials from banking institutions have also pointed to insufficient rainy day funds as a possible problem, should the country find itself in the grips of a full-on economic recession.

Road to Recovery

Various forces impact recovery from a recession. Though savings rate is only one indicator, it’s an important measure of recovery potential. When the financial crisis struck a decade ago, countries heading into the recession with net household savings rates above their ten year average recovered faster than countries with weaker savings rates. On the other side of the coin, countries entering the global recession with savings rates below their ten-year averages struggled to recover at the same pace as countries with brisk rates of savings.

Countries such as New Zealand and Switzerland, which had healthy savings rates leading up to the recession recovered quickest, reaching pre-crisis economic levels within two years. Spain, Portugal, and other countries with less robust savings rates (below their ten-year averages) didn’t fare as well, requiring 9-10 years to fully recover from the global downturn. By comparison, Britain had a savings rate slightly below the average level, taking about 5 years to recover from the recession.

Conclusions

British wages are growing at their fastest rate in years, so households have more money to work with, correcting savings deficiencies. In light of current conditions, however, many observers feel a significant recession will require government investment to spark economic recovery. British consumers are not in a position to drive a sustained recovery without help.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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