Household savings to break £1 trillion mark as UK shuns bad spending habits

A cash balance of £1 trillion, debt of £1 trillion and assets of more than £3 trillion? If this were the balance sheet of a company, investors would be forgiven for seeing it as a safe bet.

In fact, it describes the UK, at least according to forecasts by HBOS, the banking group that includes the mortgage bank Halifax.

In other words, households hold net assets worth something of the order of double the size of the £1.3 trillion economy.

This is a country that, if the doom mongers are to be believed, is teetering on the brink of an imminent crash in the housing market

HBOS expects household savings to break through the £1 trillion pound mark for the first time this year, close to the size of both consumer debt and the annual output of the economy.

Analysts have long said Britons are saving too little given the growing longevity of the population and the concern over pension provision. Finally their wish might come true.

"Our best guess is that household savings will move up from here and it would be a good thing if it did," David Miles, the chief UK economist at Morgan Stanley, said. "It is a combination of higher interest rates and, perhaps more importantly, an increasing realisation by many people that the increase in life expectancy means that they must save more."

The savings ratio as measured by the Office for National Statistics - the percentage of income after taxes and housing costs saved rather than spent - has fallen in recent years.

Mr Miles said it had averaged about 8 per cent over the past 40 or 50 years but has recently dropped to about 5.5 per cent.

It hit a historic low of 3.1 per cent in the second quarter of 2005 as households embarked on a spending spree in the face of a sharp decline in their disposable incomes.

It rebounded after that, hitting 6.2 per cent at the end of 2005 thanks to a combination of a sudden drought of consumer spending and a collective decision by companies to refinance their defined benefit schemes.

Since then it seems the consumers have returned to their old bad habits. Quarterly growth in consumer spending averaged above 0.5 per cent in the first nine months of last year, despite a slowdown in the pace of wage increases. The savings ratio fell to 5.8, 5.4 and finally 5.1 per cent in the first three quarters of the year.

Of course, as Mr Miles points out, this includes net pension wealth, which is hardly a liquid asset. Stripping that, the savings ration is about 1 per cent.

HBOS sees the ratio returning to 2005's 6.2 per cent peak over the course of this year.

"Households are rediscovering the savings habit," Martin Ellis, the chief economist at HBOS, said. "The saving ratio is expected to increase to its highest level for six years in 2007 - comfortably above the average over the past few years."

Of course an increase in savings must mean a slowdown in spending, both on the high street and through the estate agent.

"The balance of risk to our forecast that consumer spending growth remains below average this year is probably to the downside," Mr Miles said.

Howard Archer, the chief UK economist at Global Insight, agreed, saying that a widely expected interest rates increase next month would lead households to rein their spending. "People will start wondering if they are going to go up any more and they will probably be keen to improve their savings position," he said.

They certainly have good reason to start saving. Official figures show that the number of bankruptcies has risen exponentially over the past year, particularly among debtors taking advantage of the new voluntary insolvency route.

The Bank of England had held to its view that while these cases are often a tragedy for the people involved, it is not large enough to rock the economy.

Mr Archer said he accepted that view but warned: "More and more people are being sucked into problems and that's the kind of thing that will grab headlines and that in turn will cause more caution."

This will have a direct knock-on impact for two of the most important sectors of UK business - retailers and high street banks.

Christmas has again turned to be much better than many of the doom mongers forecast. Sales in December were 4.4 per cent up on 2005, according to the British Chambers of Commerce. But there is a fear that consumers who have been living on borrowed time - and money - will start to cut back once the January sales are over

Economists believe consumers can absorb the cumulative impact of rising taxes, soaring utility bills, rising interest rates and modest earnings growth for only so long.

"The retail sector overall seems to have performed somewhat better over the festive period than was anticipated," George Buckley, the UK economist at Deutsche Bank, said. "Still, that does not guarantee such conditions will last."

Even Marks & Spencer, which emerged yesterday as one of the winners from the festive period with like-for-like sales growth of 5.6 per cent in the three months to December, struck a note of caution. "The burden on consumers is getting tougher," the chief executive, Stuart Rose, said. "There are costs coming through ... so there will be a bit of belt tightening going on." Last week Next, the clothing store, warned of "challenging times".

There is already evidence that consumers are taking action to sort of their financial woes. Credit card junkies have gone cold turkey - made net repayments of their debts in eight of the 11 months of 2006 for which we have figures.

If lending slows and savings rise then the financial services industry will have to switch the focus of its search for new business in order to maintain its income stream from the non-mortgage side of its household business.

John Hitchins, the UK banking leaders at accountants PricewaterhouseCoopers that published a survey this week pointing to uncertainty in the sector, said banks were concerned about future levels of demand.

"There was a notable variation between the sectors on the outlook for the retail customer segment," he said. "Unsecured lending fell this quarter and 30 per cent of banking respondents expect further declines."

Given that deposit accounts are low margin, Mr Hitchins said the banks would be keen to sell more lucrative investment products.

Bancassurers such as HBOS and Lloyds were well placed to sell insurance-style products while most other high street banks had tie-ins with insurers.

On the lending side Mr Hitchins warned that there was a risk that their unsecured lending stock would start to shrink if repayments out-paced new lending.

The mortgage side of the banks' business could be hit if the housing market slows as many forecasters expect. After 10 per cent rise in 2006, Halifax expects the average price to grow by just 4 per cent in line with average earnings.

"Higher interest rates, greater pressure on household finances and subdued real earnings growth, however, will constrain housing demand," Mr Ellis said. "House price growth is set to ease as a result."

While 2007 does not look like the year when the consumer economy goes into the deep freeze, it could certainly feel a little more chilly.

"I don't think it will be terminal," Mr Archer said. "But I think it will limit consumer spending and given that is 66 per cent of the economy it will limit the upside for growth."