(Bloomberg) -- Economic growth in the UK may have lagged behind the much faster pace seen in the US because households are still sitting on excess savings worth up to £338 billion ($437 billion), according to the Office for National Statistics.
British consumers have continued to add to a pile of savings initially built up during Covid lockdowns rather than run them down in a spending splurge like in the US.
In an analysis published Monday, the ONS said the total value of excess saving accumulated since the start of the pandemic is estimated to range from £143 billion to as high as £338 billion.
The analysis suggests that the economy may yet get a boost from households if more confident consumers begin to unwind their savings. However, separate figures suggest that much of this money is locked up in time deposits and has been accumulated by wealthier households that are less likely to spend them.
The saving ratio — the amount of disposable income that people choose not to spend — remains well above levels seen in the years before Covid amid weak consumer confidence and the cost-of-living crisis. However, household confidence is improving and hit the highest in almost three years in July, according to GfK.
“UK households have been reluctant to spend these accumulated savings, unlike in the US where it has been an important factor in supporting household consumption and economic growth,” the ONS said.
It added that the different spending patterns in the UK and US “may partly account for respective economic growth rates of different countries since the pandemic.”
US gross domestic product grew 2.5% in 2023, much faster than the stagnant 0.1% increase seen in the UK, and is forecast to outperform Britain in 2024, 2025 and 2026. America’s economy is now almost 9% bigger than before the pandemic, while Britain’s is just 1.8% larger, lagging every Group of Seven bar Germany.
The much healthier financial position of UK households may still not lead to a consumption boom, as consumers have locked up most of their savings. Previous analysis suggests that much of the savings were built up by wealthier households, who have a lower propensity to spend than poorer consumers.
Sanjay Raja, chief UK economist at Deutsche Bank, estimates that household savings are now exceeding their debt for the first time on record.
While he said improving consumer confidence “should coincide with lower savings,” he also noted that “almost all of households’ excess savings now sit in time deposits.” Consumers have moved money into accounts where it will be locked up for a period to take advantage of better returns since interest rates jumped.
“With inflation receding, households and firms are likely to spend and invest in more productive parts of the economy,” he said.
©2024 Bloomberg L.P.
