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Creditfix LB 03-2017

British Households to Start Saving Again

The consumer credit boom is expected to soon end and savings start to rise again according to new forecasts from the National Institute for Economic and Social Research (Niesr).

The well documented consumer credit surge over recent times have seen household unsecured borrowing grow at rates of over 10 per cent per year.

At the same time, the proportion of household income put aside as savings fell to a record low of 1.7 per cent during the first quarter of 2017.

However, the latest forecast from Niesr expects consumers to change habits in the near future, triggered by a slowdown in the economy coupled with a gloomier outlook on employment.

Amit Kara, Niesr?s head of UK macroeconomics research, commented: ‘Our view is that consumer spending will be squeezed and households will look to start rebuilding savings from here.’

He continued: ‘We have a modest rise in unemployment in our forecast and historically a rise in unemployment has been accompanied by higher savings. There are, of course, huge risks around this view, including the possibility that consumer spending powers ahead and household saving falls further.’

The proportion of savings to household income is forecast to rise over the rest of 2017, ending the year at 2.8 per cent for the whole year.

Furthermore, the institute expects the savings to household income ratio to increase further over the next few years. Their forecast is for a ratio of 4.8 per cent in 2018, 6.5 per cent in 2019, 7.7 per cent in 2020, and peaking at 8.4 per cent in 2021, which would represent the highest savings ratio for ten years.

This expected level in 2021 would mean that households become net lenders to the rest of the economy to a level of 0.1 per cent of national gross domestic product (GDP).

However, there is a fear that households may switch from borrowing to saving quicker than forecast, affecting economy growth.

Niesr director, Jagjit Chadha, said: ‘The risk still remains that if households feel that they’re overextended, there is a concern that they will start to save more abruptly, and this will lead to a further downturn in the economy.’

He continued: ‘It is a concern for us that households are nudging towards the end of their credit lines and maybe hitting barriers in terms of how much they can continually borrow. When we put that in conjunction with the low level of savings, there is concern that there may be a rapid adjustment.’

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