Britons have saved nearly £200bn during the pandemic but will this now fuel a recovery? It’s complicated

The CEBR today forecasts that the UK savings ratio will hit 19 per cent of disposable income by the end of 2020, a huge increase on last year, writes James Moore

The pandemic has forced Britons to save but what will they do with the money they have squirrelled away?  (PA)

While Covid-19 has delivered a devastating economic blow to some people, others have prospered. What the latter group does next will be crucial to how UK plc performs next year.

Britons who’ve held onto jobs that provide them with disposable income after all their expenses are covered have had precious little to spend it on with restrictions aimed at containing the virus curtailing most, if not all, of their normal activities.

In April, the Centre for Economics & Business Research (CEBR) forecast that households would accumulate as much as £23bn more in savings during during the second quarter of 2020 than in a normal year.

This morning it publishes an update to its projections, calculating the total savings amassed by UK households in 2020 as a whole. The number is huge. 

The CEBR describes the fall in spending, both as a result of restrictions on economic activity and a lack of consumer confidence, as “dramatic”.

The group estimates that average household spending will end up 14 per cent lower in 2020 than it was in 2019. Combined with an estimate of disposable income for the year, this enables it to forecast the savings rate, which it puts at 19 per cent of disposable income. That’s more than double the 7 per cent recorded in 2019. It equates to £197bn in total, or to £7,100 per household. The £197bn question: what will households do with this money?

First off, it’s important to realise this vast lake of cash is far from evenly spread. Millions of British households barely had any disposable income before the pandemic struck. Citizens Advice estimates that 6 million UK adults have fallen behind with at least one bill during its course. If you take them out of the equation, the average per household will be even higher.

A substantial chunk of the money will have been pumped into people’s pensions or invested, so it will not be available for some time. But there is still a considerable amount there to be spent; when it starts to flow into the economy very much depends on when the economy opens up and how confident consumers are about their prospects and their safety.

The first of the pair is inevitably going to be affected by a couple of important events.

The Job Retention Scheme, which has subsidised the wages of millions of furloughed private sector workers, is slated to close in the spring. Blood will inevitably start to flow when this bandage is taken off because some of the jobs it has shielded will end up getting cut. Unemployment has not yet peaked, and people who feel their jobs are at risk will surely be inclined to keep any spending on hold.

The other economic goblin is Brexit. The government’s catastrophic mishandling of this is surely going to deliver another heavy blow to confidence when pictures of the queuing lorries start showing up on screens and more jobs get lost in the flood. It will serve as another major impediment to a consumer-led recovery.

The CEBR cites people’s holiday intentions as a potential clue to the current level of confidence, noting that the reduction in holiday spending made up a significant proportion of savings people have made this year

Some 29 per cent of respondents to a recent YouGov survey said they were not planning on travelling at all in the next year. However, 30 per cent were planning an international holiday. This, says the CEBR, suggests spending in the category will edge up, but not quite to the level it was at in 2019. How much of a read across there is when it comes to other sectors remains to be seen.

There is obviously considerable pent up demand for arts, entertainment and live sports. The desire for fun after a miserable year is understandably strong. But, as I wrote last week, the organisers of big outdoor events are finding it difficult to get started through a lack of available insurance, prompting a cross-party group of MPs, peers and organisers to call for the government to step in and play the role of insurer of last resort.

This is just one sting in the pandemic’s tail that will outlast the end of restrictions, whenever that occurs. There will be others, and Brexit will deliver still more.

So any recovery in 2021 is going to be bumpy indeed, which is fine for those of us in the business of writing about finance and the economy, much less so for people at the sharp end of it.