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A tale of two savings rates

There is a striking divergence in savings rates between the US and UK currently (see chart). The very low savings rate in the US has been helping to drive consumer spending, keeping US GDP growth strong, while the high savings rate in the UK lay behind the weakness in the UK economy last year.

In the US the savings rate is far lower than pre-Covid and not far off levels seen before the GFC. The latest monthly figure, for March, was just 3.2%. We probably shouldn’t be too surprised because jobs are plentiful and both house prices and stock prices have been strong. Why save?

In the UK the savings rate is much higher than pre-Covid, at 10.2% for Q4 2023 (the last data available). We probably shouldn’t be too surprised by this either. While unemployment is also low, house prices and stock prices have been much less buoyant than in the US. And the energy shock as well as economic policy turmoil and tax increases have likely left UK consumers nervous.

But what does this divergence mean for future economic growth? I should first say that forecasting savings rates is notoriously difficult, which is a problem because consumer spending is about 70% of GDP and therefore central to economic growth performance. But here goes anyway. 

There is no particular reason to expect the environment for US consumers to worsen, raising the savings rate.  True, the labour market is slowly easing from its extremely tight position a couple of years ago. But unemployment is still below 4% and there are still more job openings available than pre-Covid. Housing and stock prices remain buoyant.

In the UK though, the savings rate could easily drop. The energy shock is over now and perhaps confidence will settle down. In fact we know that GDP unexpectedly rose 0.6% in Q1, much faster than expected, and household spending was one of the drivers. The Bank of England’s April Monetary Policy Report predicted that the savings rate would average 10 1/4 % this year, before falling in future years. But the Q1 GDP figure suggests the savings rate is already falling.

What about accumulated savings from the Covid era?

Another reason for the low savings rate recorded in the US over the last 18 months could be the accumulated savings from the Covid period. Why save more if you already have a big nest egg? The latest estimates from the San Francisco Fed (published last week) suggest that US consumers have entirely spent their accumulated savings now. ThIs could suggest that the ongoing savings rate will pick up at least a little, slowing US GDP growth.

That said, the SF Fed view is in line with what I wrote above: As long as unemployment is low and asset prices are buoyant Americans will probably keep spending.

In the UK households also enjoyed high savings in the Covid years as the chart shows. The Bank of England, looking at bank deposits, has argued that these have been eroded by inflation and so have returned to pre-Covid levels in relation to household income. In other words, there is no overhang of savings now. However, Fitch argued last November that looking only at deposits is misleading because UK consumers squirreled away an extra £280bn (10.7% of GDP) of savings from the Covid period into pensions and other investments. Unlike in the US these have not been used to increase current spending (as shown by the ongoing high reported savings rate).

Of course, as Fitch argues, because they have been invested, they are not available to be immediately spent. Still, I would argue that they could contribute to UK consumers being more confident about the future and so perhaps save a little less going forward.

The bottom line is that US consumers have spent the Covid hoard while UK consumers mostly saved it. As the shocks facing the UK consumer recede (hopefully), the UK savings rate is likely to go down from its unusually high level. In contrast, with their accumulated savings spent, the US savings rate could go up, at least a bit, from its unusually low level. That points to stronger UK growth and, at least slightly weaker US growth in 2024-5.

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