Why is the UK economy so resilient? We saved huge amounts of money during the pandemic and those funds are now keeping families afloat, says HAMISH MCRAE
Here’s a puzzle. Why is the UK economy so resilient? It has received a huge amount and it still suffers from slightly higher inflation than most other developed countries.
But contrary to IMF forecasts, it manages to maintain some growth, unlike the Eurozone, which is in recession. According to Nationwide Building Society, the fall in house prices seems to have stopped in June. Retail sales increased in both April and May. And Lloyds Bank’s survey of business confidence has just reached a 13-month high.
This may not be brilliant, and some sectors are still struggling, but it’s a hell of a lot better than official forecasts predicted. Why?
Start with the general characteristic of Britons, that if we have some money we like to go out and spend it. Household consumption in the most recent ‘normal’ year, 2019, amounted to 64 percent of GDP.
That is lower than the US, where it was 67 percent, but much higher than France at 54 percent, or Germany’s 52 percent. Thus, a high level of consumption acts as an anchor for an economy, in that it helps to keep things going in difficult times.
Excess Savings: Huge sums during the pandemic and those funds are now keeping families afloat
But we must have the money. Why is that, given how wages have lagged prices? The best answer is that we saved huge amounts of money during the pandemic and money now keeps families going.
So-called excess savings – which are above normal levels that would have been expected had there been no lockdowns – are estimated to be around £200bn. To put that in context, GDP is about £2.2 trillion, so this unused pot isn’t far off 10 percent of GDP.
It could be even more, according to a study published a week ago by the US Federal Reserve. It looked at different countries and different ways of calculating what savings really are ‘excess’, eventually estimating that the UK’s savings could be as high as 13 per cent of GDP. If true, it would be the largest piggy bank, relative to the size of its economy, of any major developed country. Americans, by the way, have used up their excess savings so quickly that they are running out.
Surprised? Well, as with all economic data, you have to be careful. The pot of money isn’t evenly distributed at all, and as higher mortgage payments bite, the impact of those households austerity may offset the spending of those families that are still splurging. Even a huge pile of cash will eventually run out, as seems to be happening in the US.
Consumer resilience may prompt the Bank of England to push interest rates even further, although we have every right to resent the accusation that inflation is our fault if we decide to spend the money we have prudently saved.
But the size of this pot explains a lot. It explains why the forecasts for the British economy were too gloomy. The economic models that forecasters rely on cannot account for the effect of excess savings because a situation like this has never happened before. It explains why house prices have been fairly resilient so far.
Many people can buy a house for money. It explains why many service companies are doing well. Part of the money saved can be spent on airline tickets and a holiday abroad. It explains why higher interest rates are a source of relief rather than misery for experienced savers.
You can get 5.25 percent on biennial government bonds, encouraging a flood of money out of banks and into government bonds. I hope the banks get the message soon, because it’s just not fair for smart savers with lots of money to profit at the expense of others.
And the investment implications of all this, aside from putting money into short-term gilts, are starting to make sense. On the negative side, we should be cautious about the current strength of the US economy, and therefore US stock prices. Apple, the most valuable company in the world, broke the $3 trillion mark on Friday, and investors will be cheering on this side of the Atlantic as well. But if the Fed is right and US households have spent virtually all of their excess savings, they won’t be able to sustain their spending for months to come.
The positive note? It is that our economy will continue to surprise positively, benefiting UK-oriented companies, especially those that have been neglected and offer real value. Ultimately, global investors will get the message. Meanwhile, there are bargains to be had.