A narrative that emerged as global economies exited the pandemic was that we could be in store for a 'roaring 20s' economy, with all the extra savings spent quickly in a way that would ensure rapid growth. This was part of the argument made by some, including James Klempster, deputy head of multi-asset at Liontrust, for rotating to value stocks in 2021.
The mood music in the economy has changed sharply since the start of this year, with the economy actually contracting in March as the impact of much higher inflation takes hold.
Such is the present level of uncertainty in the economy that the BoE are forecasting a recession in the final quarter of this year as a result of numerous factors, including the war in Ukraine, the continuing Covid measures in China and Brexit, all pushing inflation upwards and spending downwards.
So what of the savings glut?
Laith Khalaf, financial analyst at AJ Bell, says the savings glut is the equivalent of “consumers having been restrained by law and are now being gradually let off the leash”.
The latest data from Barclaycard indicates that consumer spending rose by 9.3 per cent in May.
Julian Jessop, economics fellow at the IEA, says that while the headline number looks very impressive, and implies the consumer is in rude health, that 9 per cent increase is in cash terms, and with inflation in the UK also at 9 per cent, that implies consumers are merely keeping up with their previous spending habits, rather than spending more.
In this way, the savings glut may not help enough households to maintain their spending sufficiently to stave off the recession expected later this year.
Silvia Dall’Angelo, senior economist at Federated Hermes, says one of the issues may be that much of the excess savings is in the hands of people who worked from home during lockdown periods, and the bulk of those are people in higher income brackets and so with less propensity to spend any excess.
In that scenario, the excess savings do not replace the aggregate demand lost as a consequence of the higher inflation, and demand in the economy overall is reduced.
If the excess savings do not translate into an increase in spending at least matching the rate of inflation, whether there is a recession or not, it would have an extremely negative impact on the retail sector and other parts of the economy.
david.thorpe@ft.com
