Comment: The contrarian beast we struggle to tame

When it rises it points to a panic. When it falls, we’re heading for trouble. It never sits still and when it moves, warning bells sound.

Bill Jamieson. Picture: Ian Rutherford

I refer to that most ambiguous and often counter-intuitive indicator of our well-being – the household savings ratio – saving as a proportion of consumers’ disposable income. It fell to just five per cent in the final quarter of last year, down from the previous quarter and from 6.1 per cent in the final quarter of 2012.

Cue tut-tutting from critics that the UK’s recovery is being fuelled by a raid on our savings kitty and will prove unsustainable. But as consumer spending is a driver for some two-thirds of the UK economy – it contributed 1.4 per cent of the total 1.7 per cent GDP growth – it would be hard to have a recovery without a household spending rise.

A key rationale for record low interest rates was to encourage households to save less and spend more to help stimulate the economy and get a recovery under way. Conversely, when the economy is over-heating and inflation threatening to explode, interest rates can be raised to encourage people to defer spending.

So when the official aim has been to hold down interest rates to get business and households spending, isn’t the savings ratio supposed to fall? What on earth did they expect?

Other factors, of course, have a strong influence on this ratio, often with counter-intuitive results. Contrary to the age-old admonition to “save for a rainy day”, we don’t save so much when times are good. Thus the savings ratio fell during the boom periods of the mid-1990s but rose sharply during the financial crisis of 2009-10, grazing eight per cent, though interest rates fell.

Inflation also has an influence on savings returns. It can act to make regular saving difficult as now for many and as a deterrent to long-term saving.

And then, of course, there is tax. Many deeply resent having to pay tax on interest earned on savings built out of already taxed income.

How does household saving in the UK compare with other countries? According to figures from Lloyds Banking Group, the savings ratio in Germany has been much more consistent in recent years, at around ten per cent. In China, the savings ratio has soared, rising from 27 per cent in 2001 to 47 per cent in 2011. This remarkable level reflects the lack of a safety net (eg: state pensions and benefits) leading to a higher precautionary motive to save.

The Chinese have been saving a proportion of disposable income around nine times higher than the proportion saved in the UK. Only around one in 30 Chinese adults has no form of savings, investments or pensions wealth, meaning that UK adults are almost four times more likely to be “flat broke” than Chinese adults. Moves here towards a cap on welfare spending may thus concentrate minds on the value of saving.