The most important graph for the UK economy?

ScreenHunter_01 Sep. 06 07.42

Cross-posted from

I’ve argued before that if I was forced to choose just one graph to understand the UK economy over the last two and half decades, the one I’d go for is the household savings ratio.

Annoted savings graph

I’ve marked the three stages of the UK economy since 1992. The ‘great moderation’ of unbroken growth from 1992 to 2008 – characterised by a falling savings ratio, the sharp recession of 2008/09 – with a rapidly rising savings ratio and the virtual stagnation of 2010-2012 – complete with flat-ish savings ratio.

In the absence of either strong growth in household incomes (which looks unlikely at the moment) or extremely rapid rebalancing towards investment and net trade (also looking unlikely at the moment) then this chart will almost certainly continue to be one of the most important indicators for the UK economy.

If the household savings ratio remains broadly flat then so will the economy, if if suddenly rises again then renewed recession is likely and if it starts to drift downwards then household spending will rise quicker than household incomes providing a boost to growth.

I don’t think I’m the only one who has noticed this. It is hard to read current Treasury policy on the housing market as anything other than an attempt to drive down down the household savings ratio by encouraging more mortgage borrowing. Rebalancing, as I noted after the budget, has been all but abandoned.

Last week’s forecasts from the Item Club confirmed this. The International Business Times noted that rebalancing is ‘on hold’ whilst the “government’s influence on the housing market could spike consumer spending and engender a faster recovery than many UK businesses are currently anticipating”.

The question then becomes – are policies that drive down the household savings ratio desirable? And here I think the answer is far from clear. Of course faster consumer spending would provide a boost to GDP in the short to medium term but in the longer term is rising household debt not one of the key factors behind the mess we are now in?

In the long run a recovery will only be sustainable if it is build on the solid foundations of rising household incomes. Sadly that doesn’t look to be happening anytime soon.

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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  1. Government needs more economic activity to collect more gst and tax receipts, then lower currency is also desirable so lets print money to fund housing boost and force people to buy it that would be win win – lower currency and more tax receipts. Though the UK is not export nation who benefits from lower currency there?

    • donkeea…while lowering the currency what do you do about inflation?
      The western world has had low inflation, not by its own productivity, but by importing more and more cheaper and cheaper goods. This has now come to an end. Chinese demographics, prosperity and cultural change ensure this is so.
      So now we are going to lower our currencies into the teeth of rising inflation. How is this all going to work? Our democracies are likely to get badly chewed.

      • Re lower currency and more tax receipts…you forgot to mention the balancing more debt. How much debt can we all sustain and how does more debt help?

        • Unfortuately, world seems embraced Krugmanomics – where debt issued in local currency does not matter, as government can print local currency. Had they done this printing alone that would centainly lead to a run on pound and eventual default, but seems rest of the world printing so UK gov has a room to print without affecting exchange rate. But why they direct these funds to kickstart next housing bubble instead of infrastructure spending for example its beyond me.

  2. There is one other slight problem that is being ignored.
    The household savings have been offset by Government deficits hence the UK economy runs a chronic and growing CAD.
    While the CAD has been financed by foreign inflows into its quite massive financial markets the pound is starting to suffer.

    If the savings ratio turns down and govt deficits are not correspondingly cut the CAD starts to rise even further and the pound is likely to suffer serious consequences.

    Round and round! Down and down! The great whirlpool of debt sucks us all in.

    For the long term sustainable economy either the Govt deficit has to fall while savings remain high or savings must increase further while not increasing the Govt deficit.
    Production has to rise..significanlty and quickly. Given the wholesale destruction of British manufacturing, the decline in North Sea Oil production, and the general economic ignorance of the real problems we all face, this looks unlikely.

    Wishing for increased real productivity and production i.e. production of real goods rather than more ‘services of dubious worth’ doesn’t make it happen. Indeed the now built-in obstacles to production built into economies makes this outcome a near impossibility.

    I suspect the UK economy is nearly as ill-equipped for the future as is the Aus economy.

  3. Give me the “affordable housing and healthy levels of discretionary income” economic model any day. The great “housing is wealth” Ponzi lunacy merely increases the number of people who WON’T have a house at all when they reach retirement age, while far more of those that DO, won’t have OTHER investments. And there is no guarantee that this generation who will need to realise the “wealth” in their houses after retirement, will realise what they are now thinking they will. The younger generation is far too screwed to keep paying boomers through the nose for housing indefinitely, especially once all the boomers at once need to “realise” that “housing wealth”.

    The UK is decades ahead of Aussie in this lunacy, and it is all playing out exactly by the book. Young Aussies should properly explore UK cities when they visit there, to see what the future holds. That means going outside the touristy, yuppieville areas to where most of the proles eke out a grim existence.

  4. I notice the author is from the UK’s Trade Union Congress, and the report is ideologically neutral. I wonder if we would get the same from our ACTU (or the BCA for that matter).

  5. The great John Maynard Keynes offered only one piece of advice about the long term management of the economy. namely: “In the long run we are all dead”

    Persistent CAD is clearly a long term problem, that really does not seem to restrict an economy in the short to medium term. This is amply demonstrated by the abilities of most western countries to enjoy high standards of living despite running increasing levels of CAD for 30 to 50 years.

    So the question naturally arises, is CAD even relevant and, if so, in what ways does it restrict our economies.

    As a manufacturer I hate the concept of allowing long term CAD because it invariably means that imported goods are cheaper than goods manufactured within your own economy. CAD can only really occur when the exporting nation willingly accepts an IOU instead of swapping physical goods, this makes CAD a clear violation of Say’s law, and as such an irrational strategy for any businessman to pursue. However when a whole nation pursues a CAS strategy they indirectly suppress their internal wages and operating costs and decrease the ability of their population to purchase imported goods. Logically a CAD country follows the opposite path meaning that in the long term a CAD country cannot afford to do anything for itself, they must buy everything. As locally produced goods and services become uncompetitive the wealth of the nation must logically focus itself on non-tradeable assets with grossly inflated values. Interestingly since these are the only “assets” within the CAD country, it follows that the CAS country must focus their attention on attaining these assets in reward for continuing to support the CAD nation.

    Presumably the end game occurs when the assets of the CAD country are so insanely valued that they become unattainable by the majority of their people and are mostly owned by the CAS country. So much for the theory that CAD’s enable a higher standard of living.

    • Very good.

      The delusional left fail to grasp how their policies beggar the future. There is NO choice but for us to accept the reality of competing in a global market place, reducing our welfare system, and our reliance on debt and inflated asset prices. That said, the right lack the vision and leadership to make the hard decisions and bring the country along. This country needs strong leadership now more than ever in its history, and with a resolute focus on changing our culture and economic structure away from unearned consumption.

    • +100, China-bob.

      Theoretically, as you approach the point at which there are no more “IOU’s” to be given by the CAD country, the CAS country HAS to start “buying stuff (not assets) back off the CAD country”. No matter how uncompetitive it is.

  6. ‘In the long run a recovery will only be sustainable if it is build on the solid foundations of rising household incomes. Sadly that doesn’t look to be happening anytime soon.’

    In the meantime the Accounting Identity weaves its inevitable magic.