Whatever happened to savers and the savings ratio?

A feature of the credit crunch era has been the fall and some would say plummet in quite a range of interest-rates and bond yields. This opened with central banks cutting official short-term interest-rates heavily in response to the initial impact with the Bank of England for example trimming around 4% off its Bank Rate to reduce it to 0.5%. If we go to market rates the drop was even larger because it is often forgotten now that one-year interest-rates in the UK rose to 7% for around a year or so as the credit crunch built up in what was a last hurrah of sorts for savers. Next central banks moved to reduce bond yields via purchases of sovereign bonds via QE ( Quantitative Easing) programmes. In the UK this was followed by some Bank of England rhetoric heading towards the First World War pictures of Lord Kitchener saying your country needs you.

Here is Bank of England Deputy Governor Charlie Bean from September 2010.

“What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.

Our Charlie was keen to point out that this was a temporary situation.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Mr.Bean was displaying his usual forecasting accuracy here as of course savers have seen only swings and no roundabouts as the Bank Rate got cut even further to 0.25% and the £79.6 billion of the Term Funding Scheme means that banks rarely have to compete for their deposits. This next bit may put savers teeth on edge.

“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

In May 2014 Charlie was at the same game according to the Financial Times.

BoE’s Charlie Bean expects 3% interest rate within 5 years

There is little sign of that so far although of course Sir Charlie is unlikely to be bothered much with his index-linked pension worth around £4 million if I recall correctly plus his role at the Office for Budget Responsibility.

House prices

I add this in because the UK saw an establishment move to get them back into buying houses. This involved subsidies such as the Bank of England starting the Funding for Lending Scheme in the summer of 2013 to reduce mortgage rates ( by around 1% initially then up to 2%) which continues with the Term Funding Scheme. Also there was the Help to Buy Scheme of the government. I raise these because why would you save when all you have to do is buy a house and the price accelerates into the stratosphere?

The picture on saving gets complex here. Some may save for a deposit but of course the official pressure for larger deposits soon faded. Also the net worth gains are the equivalent of saving in theoretical terms at least but only apply to some and make first time buyers poorer. Also care is needed with net worth gains as people can hardly withdraw them en masse and what goes up can come down. Furthermore there are regional differences here as for example the gains are by far the largest in London which leads to a clear irony as official regional policy is supposed to be spreading wealth, funds and money out of London.

There is also the issue of rents as those affected here have no house price gains to give them theoretical wealth. However the impact of the fact that real wages are still below the credit crunch peak has meant that rents have increasingly become reported as a burden. So the chance to save may be treated with a wry smile by those in Generation rent especially if they are repaying Student Loans.

Share Prices

This is a by now familiar situation. If we skip for a moment the issue of whether it involves an investment or saving as it is mostly both we find yet another side effect of central bank action. In spite of the recent impact of the North Korea situation stock markets are mostly at or near all time highs. The UK FTSE 100 is still around 7300 which is good for existing shareholders but perhaps not so good for those planning to save.

Number Crunching

There are various ways of looking at the state of play or rather as to what the state of play was as we are at best usually a few months behind events. From the Financial Times at the end of June.

UK households have responded to a tight squeeze on incomes from rising inflation, taxes and falling wages by saving less than at any time in at least 50 years. According to new figures from the Office for National Statistics, 1.7 per cent of income was left unspent in the first quarter of 2017, the lowest savings ratio since comparable records began in 1963.

This compares to what?

The savings ratio has averaged 9.2 per cent of disposable income over the past 54 years,

Some of the move was supposed to be temporary which poses its own question but if we move onto July was added to by this.

In Quarter 1 2017, the households and NPISH saving ratio on a cash basis fell to negative 4.8%, which implies that households and NPISH spent more than they earned in income during the quarter.

The above number is a new one which excludes “imputed” numbers a trend I hope will spread further across our official statistics. It also came with a troubling reminder.

This is the lowest quarterly saving ratio on a cash basis since Quarter 1 2008, when it was negative 6.7%.

As they say on the BBC’s Question of Sport television programme, what happened next?

The United States

We in the UK are not entirely alone as this from the Financial Times Alphaville section a week ago points out.

Newly revised data from the Bureau of Economic Analysis show that American consumers have spent the past two years embracing option 2. The average American now saves about 35 per cent less than in 2015……….Not since the beginning of 2008 have Americans saved so little — and that’s before accounting for inflation.

Comment

One of the features of the credit crunch was that central banks changed balance between savers and debtors massively in the latter’s favour. Measure after measure has been applied and along this road the claims of “temporary” have looked ever more permanent. Therefore it is hardly a surprise that savings seem to be out of favour just as it is really no surprise that unsecured credit has been booming. It is after all official policy albeit one which is only confessed to in back corridors and in the shadows. After all look at the central bank panic when inflation fell to ~0% and gave savers some relief relative to inflation. If we consider inflation there has been another campaign going on as measures exclude the asset prices that central banks try to push higher. Fears of bank deposits being confiscated will only add to all of this.

Meanwhile as we find so often the numbers are unreliable. In addition to the revisions above from the US I note that yesterday Ireland revised its savings ratio lower and the UK reshuffled its definitions a couple of years or so ago. I do not know whether to laugh or cry at the view that the changed would boost the numbers?! I doubt the ch-ch-changes are entirely a statistical illusion but the scale may be, aren’t you glad that is clear? We are left mulling what is saving? What is investment?

But we travel a road where many cheerleaders for central bank actions now want us to panic over an entirely predictable consequence. Or to put it another way that poor battered can that was kicked into the future trips us up every now and then.

 

 

 

What has happened to savers in the credit crunch era?

Sometimes official new releases are more revealing than they would wish to be. For example there is a planned Help To Save scheme being floated ahead of tomorrow’s Budget. As the Help To Buy scheme for houses indicates a situation in distress with house prices far too high to be affordable we are immediately on yellow alert as to the state of play in the savings market. From the BBC.

Millions of low-paid workers who put aside savings could receive a top-up of up to £1,200 over four years, the government has announced.

Employees on in-work benefits who put aside £50 a month would get a bonus of 50% after two years – worth up to £600.

That could then be continued for another two years with account holders receiving another £600.

These schemes always initially look a good idea although those who are in similar circumstances but are excluded will no doubt find it frustrating. One may also have a wry smile at the fact that this is very similar to the Labour governments plan for a savings gateway which was abandoned because it was “not affordable” But fundamentally we are left wondering why savings needs such help.

The Bank of England is not so keen

Back in September 2010 Deputy Governor Bean of the Bank of England made a right Charlie of himself in a car crash style interview with Channel 4.

Indeed when asked this question.

This bad news for savers is the point of what you are doing?

He replied “yes”.

Mr Bean continued.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.”

Savers are still waiting Charlie! Meanwhile he revealed the plan such as it was.

What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.

The attempt at sympathy fell rather flat too.

“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

Charlie himself was doing the opposite as his index-linked pension grew by £522,900 that year according to the accounts published by the Bank of England. Of course he has been provided with additional work in retirement via the Bean Review of UK Economic Statistics making his pronouncements head down the ” let them eat cake” road. Or as Hall and Oates pointed out.

You’re out of touch
I’m out of time (time)

Help To Buy

Whilst lower mortgage rates can improve mortgage affordability for a time they cannot help with the issue of raising a deposit or equity. So we have the Help To Buy ISA.

If you are saving to buy your first home, save money into a Help to Buy: ISA and the government will boost your savings by 25%. So, for every £200 you save, receive a government bonus of £50. The maximum government bonus you can receive is £3,000.

Such is the desperation on this front that the providers seem willing to make a loss on it. From Moneywise.

First-time buyers can now get 4% interest from Santander’s Help to Buy ISA as the bank has today matched Halifax’s market leading best-buy rate.

These interest-rates as I shall explain later are far higher than can be got in other circumstances. Perhaps we get a clue here as to how much banks make from their UK mortgage books and can afford to subsidise deposits to get borrowers on the hook.

For those unaware of the UK system Individual Savings Accounts or ISAs offer income tax relief.

Savings and Deposit Interest-Rates

Moneywise gives us a theme that keeps being repeated or as the great Yogi Berra put it “It is just like deja vu all over again”

Banks and building societies continue to cut rates on both their fixed rate bonds and cash Isas…….On easy-access cash Isas, Post Office has cut its Online Isa rate from 1.45% to 1.2% for new savers. Virgin Money pays the top rate at 1.41% on its Defined Access Isa, but you are restricted to three withdrawals a year. Coventry BS Easy Isa pays 1.4%.

You may note that the Post Office has acted as if there has just been a Bank Rate cut of 0.25%, are they getting ready? The Bank of England records it like this.

The effective rate paid on households’ outstanding time deposits decreased by 2bps to 1.44% in January and the rate for households’ new time deposits increased by 4bps to 1.36%.

Interesting isn’t it how everybody seems to get the top rate? Perhaps they should invest everyone’s savings.. Oh hang on maybe not.

The Bank of England has chopped and changed in the savings rates used in its database ( I wonder why…) but the ISA rate nearly goes back to Charlie’s speech as we have 2.41% in January of 2011 as opposed to the 0.81% of February. So savers have continued to lose over time as interest-rates have fallen as they wonder when they will be doing very well as Charlie Bean promised? Oh and is 0.81% the new 1.4%.

How much do we save?

This is measured except the number produced includes imputed saving described as “conceptual payments” and yes our old friend imputed rents gets a mention. Well to its credit (sorry…) the Office for National Statistics tried again last month and sang along to this from Stevie V.

Dirty cash
Dirty cash
Dirty cash
Dirty cash

On this basis negative saving began in 2003 and might reasonably be considered a sign of the times and a warning. This fell to an annual rate of around -6% in 2008 before springing up like Zebedee from The Magic Roundabout to just over 5% in early 2009 in a clear reaction to the credit crunch as fear led to more saving as well as more fear at the Bank of England! Next we saved for a bit until it went negative again in late 2013 where it has remained.

Under the series including imputed saving the savings ratio is usually some 5% or so higher.

Comment

In essence official policy in the credit crunch era has been to reward debtors and to punish savers. Charlie Bean made that plain and this was reinforced in the summer of 2012 as the Funding for Lending Scheme was brought in to reduce further mortgage and savings interest-rates. Unlike Lewis Carroll it is always “Jam Today” for the UK establishment. It is a bit like the famous saying of St.Augustine.

Lord, make me chaste (sexually pure) – but not yet!

This has even moved into the world of inflation as savers have recently benefited from the fact that it has fallen. If we move beyond which measure to use then real rather than nominal interest-rates have improved especially compared to 2011 when the dilatory efforts of the Bank of England saw most inflation measures go above 5% per annum. It failed to spot that punishing workers, consumers and savers would have only one result. However of course it wants inflation higher as the game continues! The moral hazard issue continues also as Lewis Carroll reminds us.

Alice:How long is forever? White Rabbit:Sometimes, just one second

Meanwhile today we get an update on the basket for the UK official inflation measure. Apparently it is more important to include coffee pods and cream liqueur than owner-occupied housing.

I will be on Share Radio which has gone national on Dab after the 1pm news today.