Savings ratios over the decades

28.06.2005 Research by Halifax Financial Services, using ONS data, shows that since 1963, the UK saving ratio (the proportion of post-tax income that households save rather than spend) has varied from a high of 12.4% in 1980 to lows of 4.9% in 1988 and again in 1999.  The current average of 5.6%, whilst above these historical lows, is still 2 percentage points below the 7.9% long term average.

The saving ratio is highly cyclical with movements in the ratio strongly associated with the UK economic cycle.  The savings rate has been at its highest (1980 and 1992) when the economy was in recession and unemployment was high.  Periods of economic buoyancy - such as the late 1980's and around the turn of the 21st century - have been accompanied by a low savings ratio.
 
The ratio reached cyclical lows in 1971 (5.0%), 1988 (4.9%) and 1999 (4.9%).  In contrast, there have been two clear cyclical peaks in the saving ratio since the early 1960s: 1980 (12.4%) and 1992 (11.6%).  These changes in the saving ratio have been strongly associated with the UK economic cycle. 
 
The savings rate has been at its highest when the economy was in recession and unemployment was high.  Periods of economic buoyancy - such as the late 1980s and around the turn of the 21st century - have been accompanied by a low savings ratio.
 
Households tend to save a smaller proportion of their income when the economy is doing well and their confidence is high, encouraging people to spend, but save a higher proportion of income when conditions are more worrying.
 
There is a strong relationship with the housing market.  The saving ratio was low during the late 1980's housing market boom, subsequently rising to high levels when the housing market went into recession in the early 1990's.  The saving ratio has fallen to historically low levels in the past few years as house prices have again risen rapidly.  Rapid house price rises increase the level of household wealth, making people more confident and reducing their perceived need to save from their current income.  Conversely, when house prices are falling, the level of their wealth is also diminishing, therefore providing a greater incentive for households to save.
 
The UK has a significantly lower savings ratio than any of the three largest continental European countries - ranging from 10.2% in France to 11.3% in Italy, according to data from the Organisation for Economic Co-operation and Development (OECD).  There has been a clear relationship between economic growth and household saving ratios amongst the world's leading economies over the past five years. 
 
The fastest growing economies between 2000 and 2004 tended to have relatively low saving ratios whilst the slowest growing economies had relatively high saving ratios.  Belgium (13.8%), Portugal (12.8%) and Spain (10.7%) also save a considerably higher proportion of income.  Outside Europe, the US has experienced a dramatic fall in the household savings ratio during the past 12 years, falling from 7.7% in 1992 to 0.8% in 2004.  Japan, a traditionally thrifty nation saw a fall in its saving ratio from 11.0% in 1998 to 5.1% in 2004.
 
There saving ratio also appears to be influenced by the general level of inflation with the saving ratio tending to be higher during periods of more rapid inflation when people feel a greater need to save as a hedge against inflation.  Correspondingly, people perceive less need to save when inflation is low.
 
The saving ratio averaged 8.5% during the period of relatively rapid inflation between 1969 and 1991 (inflation averaged 10%), but averaged 6.2% during the periods of relatively low inflation in the 1960s and 5.6% since 1998 when inflation has again been low.
 
There has been a clear relationship between economic growth and household saving ratios amongst the world's leading economies over the past five years.  Halifax research, using OECD data, shows that the fastest growing economies between 2000 and 2004 tended to have relatively low saving ratios whilst the slowest growing economies had relatively high saving ratios.
 
The economies with GDP growth averaging 2.5% and above during 2000-2004 had an average saving ratio of 3.3% between these dates.  These countries included the US, Australia, Canada, New Zealand and the UK.  At the other end of the spectrum, those countries recording average annual GDP growth of 2% and below had an average saving ratio of 9.1%.  These countries included Germany, France, Italy, Portugal and Belgium.  There were, however, exceptions in both groups with the highest growing economy analysed, Ireland, recording a high saving ratio (9.4%) whilst slowing growing Denmark had an average saving ratio of –1.4% between 2000 and 2004.
 
Commenting on the research's findings, Martin Ellis, Economist for Halifax Financial Services, said:
 
"The saving ratio remains very low by historic standards although it is above its 1999 trough.  Customers clearly save less in the good times and put more away for a rainy day when the economic outlook is less promising.  The saving ratio is probably best seen, therefore, as a good barometer of the overall state of the economy.
 
The UK has a low saving ratio compared to many of its continental European cousins.  Those countries with a relatively low rate of saving, including the UK, have, however, tended to outperform higher saving nations in terms of economic performance over the past five years."
4th June 2005