Lockdown Boosted Savings, But BOE Doubts Much More Will Be Spent

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Bank of England policy makers are sounding a note of caution about how much excess savings built up during Covid-19 lockdowns will be spent once the economy reopens.

The central bank’s Chief Economist Andy Haldane has estimated that as much as 250 billion pounds ($352 billion) will accumulate in the accounts of consumers who were unable to go on holiday, shop or eat out as much as usual. The pace of the recovery depends on whether they spend it or hold onto the savings.

While the bank’s official forecast is for 5% of that money to reappear, Deputy Governor Ben Broadbent told lawmakers Wednesday that the demographics of those with the biggest deposits point away from a splurge. The richest households built up the most cash and are least likely to spend, while the poorest were hit hardest by restrictions that closed their workplaces.

“A lot of these savings are in the form of liquid assets or deposits, so maybe they could be spent more quickly, but equally they are skewed toward people who are better off -- the old -- who already have savings and are maybe less inclined than the average person to spend out of accumulated assets,” Broadbent said. “The skew itself is noticeable and in and of itself would tend to make you want to aim for a slightly lower number.”

His stance was backed by fellow policy maker Jonathan Haskel, who cited the central bank’s latest biannual household survey with NMG Consulting. It found that 70% of people plan to continue to hold excess savings in their bank accounts instead of spending them.

What Bloomberg Economics Says...

“Given the amount of fuel available and the experience over the summer last year when restrictions were eased and spending picked up rapidly, our view is there’s a bigger risk of consumer spending rebounding faster than we expect once the economy is reopened.”

-- Dan Hanson, senior economist. Read his full INSIGHT here.

Haldane has presented a more upbeat view in recent weeks. He termed the central bank’s 5% assumption “conservative” in an opinion piece for the Daily Mail newspaper earlier this month and said he sees potential for “much more, perhaps even most of this savings pool to leak into the economy, fueling a faster recovery.”

“A year from now, annual growth could be in the double digits,” he wrote. “The economy is poised like a coiled spring.”

One thing much of the rate setting committee can agree on is the outsize effect a small change in consumers’ behavior could have on the U.K.’s path out of the crisis. Gertjan Vlieghe explained his own uncertainty in a speech last week:

“Given that we have never experienced an economic situation quite like the one we are now in, a wide range of outcomes are possible,” Vlieghe said. “Given the scale of the amounts involved, even small changes in the assumed propensity to spend out of these accumulated savings lead to large changes in the expected out-turns for consumption and the economy as a whole.”

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