Here’s why household saving has fallen to 50-year record low

The amount of money being set aside as savings has fallen to 1.7 per cent of disposable income, a record low since records began in 1963.

The data, from the Office for National Statistics, puts the average ‘savings ratio’ over the past decade at around 8 per cent, as the chart lower down this article shows.

The ratio, which is a measure of how much money individuals save as a share of their disposable income, has been on the decline over the past year. This has been driven by the fact that consumers have continued to spend and borrow following last June’s Brexit vote, despite having their incomes squeezed by lacklustre wage growth and rising levels of inflation.

A year ago the ratio stood at 6.1 per cent (for the first quarter of 2016), before dropping to 3.3 per cent for the final quarter of 2016.

On the one hand, the low ratio could indicate that households have been raiding their piggy banks to maintain their standard of living. Indeed, the ONS notes ‘the underlying trend is downwards, reflecting relatively strong consumption volumes, increasing consumer prices and subdued wage growth’.

In addition, there were some temporary factors at play, the ONS noted, including higher tax payments.  

There is, however, a big caveat in that a decline in the savings ratio can be a of sign confidence in the health of the economy. Indeed, for those who have a positive view on the economy there are certain plus points; including record low levels of employment and the fact that on the whole the UK economy has held up well and surprised on the upside since the Brexit vote.

But as Money Observer pointed out last month consumer spending has been a key driver, and is now starting to slow, falling by 0.8 per cent in May, which represents the first decline since September 2013.

Tom McPhail, head of policy at Hargreaves Lansdown, further explains: ‘This data is likely to set alarm bells ringing; whether this is in fact evidence of a confident economy or peak complacency remains to be seen. The fall in the household savings ratio is undoubtedly in large part due to the squeeze on disposable income caused by a combination of flat average earnings and rising prices.’ 

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