Savings in the UK and Beyond

Andrew Sentance from the Bank of England had a very interesting speech recently (PDF version here) on the patterns of savings in the UK with perspective to the global economy and global imbalances. In terms of the contents of the speech this is what we have ...

My talk will be divided into three main parts. First, I will look at the role that savings play in the modern economy. Second, I will review the implications of some of the changing trends we have seen over the last decade – a falling UK personal savings rate, a rising company savings rate in many countries, and growing imbalances between savings and investment
across the global economy. And I will conclude by discussing what these developments might mean for the judgements made by the Bank of England Monetary Policy Committee.

Now, I think Andrew gets a lot of things right here and especially I like the way he relates personal savings to life-cycle theory applied to populations, a point I have stressed on almost every imaginable occasion :) I have been able to. Now, let us take a look the evolution of household savings in the UK; I also recommend you to take a look in the graphs.

Personal saving is the difference between household income and consumption. It reflects a complex and very diverse set of decisions, with consumers of different ages at different points in their life cycle. What we observe across the economy as a whole is the net result of these decisions, taking into account borrowing as well as the acquisition of assets. Chart 4 shows that personal saving peaked in the late 1970s and early 1980s – though the high savings rates of that period were partly driven by the need to offset high inflation.5 More recently, this balance has declined from about 12% of personal disposable income in the early 1990s to about 5% of income at present.

Anohter interesting subject is the wealth effect of rising house prices and the correlation between consumption growth and appreciation of homes, perhaps not as clear cut as we might have thought?

As Chart 8 shows, there is clearly an association between house price inflation and consumer spending growth, but it is quite a loose and variable one. Recent house price inflation has not been as strongly correlated with consumption as in the late 1980s, and consumer spending recovered in the early 1990s against the background of a subdued housing market.

Essentially, I think Andrew provides a very solid account of the recent saving tendencies in the UK, both household and corporate savings. Turning to the international perspective of global savings the speech also provides a well argued account of the stylised facts of the global imbalances and crucially how China despite contributes a whopping 11% to the global pool of savings (some 50% of GDP). Andrew finishes off with a brief presentation of the future course of monetary policy in the UK where the BOE has been rather vigilant to raise rates recently to quell inflationary pressures (hat tip Skeptical Speculator and here.)

In essence, this well argued and referenced piece is well worth a closer look.