The Scottish Government recently published its second estimate of 2019 Q1 GDP data, which includes household sector statistics not published in the first estimate. These show that households’ disposable income rose by 3.9% over the latest year, while consumer spending rose by 2.2%. This indicates a slight increase to the household savings ratio, which may be stabilising after falling sharply in recent years. This blog looks at a few questions; what is the household savings ratio, and why should we be interested?
What is the household savings ratio?
The household savings ratio expresses how much of the average household’s income is being invested in savings products. Very simply, households do three things with their money; they pay taxes and interest on debt, they purchase goods and services (normally referred to as consumption), and whatever is left is saved or invested.
The detailed supplementary tables in the GDP Quarterly National Accounts publication provide details on household income and spending. The ratio is calculated by dividing gross savings by total household resources, which includes all earning from salaries, other income and any relevant tax credits minus expenses on taxation.
Why should we be interested?
After paying taxes, households either spend or save their money. Consumer spending is an important contributor to short term economic growth and is also used as an indicator of consumer sentiment. So, when consumer spending decreases, it can indicate that consumers are more concerned about their financial future (or economic events have constrained their ability to spend).
However, looking to the medium and long term, an economy needs sufficient levels of savings. When households save their money, banks, building societies and investment firms then make this money available as loans which fund investment in business – and this ultimately leads to productivity growth, wage increases and sustained GDP growth (at least in theory).
Scottish Households consumption and saving
From Q1 1998 until Q1 2019, Scottish households accumulated total resources of £1.746 trillion, of which £1.628 trillion was spent on consumption and £0.118 trillion was invested in savings. This is an average savings ratio of 6.8% for the period. However, the ratio in the last two years was considerably lower than the proceeding 18 years.
Economic conditions varied quite significantly in this time, of course – while 1998 to 2007 was, for the most part, an era of relatively stable growth, the global financial crisis and the regulatory response had a significant impact on the savings market. Between December 2007 and March 2009, the Bank of England reduced Bank Rate from 5.75% to 0.5%, with rates remaining low since then. While these low rates meant far less interest income for savers, this did not prompt a significant change in savings behaviour in Scottish households.
From Q3 2016 onwards, the household savings ratio in Scotland reduced quite significantly. Between 1998 and Q2 2016, the ratio was 7.5%, but from Q3 onwards this has fallen to just 3%. In this period wage increases across the UK have not matched price rises, as wage growth fell following the 2016 European Union referendum.
The Bank of England publishes data on levels of unsecured consumer debt (which for the most part is personal loans and credit cards, but also includes products like car finance). This data is only available at the UK level, but in May 2019, the Scottish Fiscal Commission noted that low consumer credit growth was flattening in recent years. We can see in Chart 4 below that growth in unsecured consumer credit increased since about 2013, reaching about 10% annual growth by mid-2016.
After this point, the growth rate slowed considerably. In its Credit Conditions Survey for 2017 Q1, the Bank of England noted that providers of unsecured credit were tightening their lending criteria, leading to a reduction in availability. This decrease in availability and tightening of lending criteria has broadly persisted since, and the Q1 2019 Survey notes that lenders expect this to continue throughout the year. If households are less able to access finance, then they face a choice about reducing spending on consumption or reducing savings.
How does Scotland compare to the UK?
While we don’t have data on unsecured lending to Scottish consumers, we can compare the UK savings ratio to the Scottish savings ratio. These quarterly ratios are set out in Chart 5 below:
From 1998 to 2004, the Scottish and UK savings ratios followed the same trend and for the most part sit between 7 and 10 per cent of household resources. However, the trends began to diverge slightly from the end of 2004 onwards. While the UK savings ratio remained broadly flat between 2004 and 2009, the Scottish ratio declined throughout 2005 and 2006, before increasing again throughout the financial crisis. However, both the UK and the Scottish savings ratios show the same decline following the 2016 referendum on European Union membership, and the subsequent tightening of unsecured lending.
So, what could this mean?
Interestingly, the Fraser of Allander Institute noted that the period 1998 to 2004 was a period of strong growth in productivity – and this coincides with a period of a relatively high and stable household savings ratio in Scotland. After 2004 and before the crisis, both output and hours worked grew at similar rates so productivity remained flat. The financial crisis caused some volatility as both output and hours worked fell, but since 2010 there was very little growth in Scottish productivity. Understanding why the Scottish household savings ratio was so subdued since 2016 Q3, and why since 2004 it was generally lower than the UK ratio could give valuable insight into the recent slow productivity growth in Scotland.
Andrew Feeney-Seale, Senior Researcher, Financial Scrutiny Unit