Britons are preparing to splash the cash. Starved of frivolous shopping and many forms of fun during coronavirus lockdowns, they are on course to have amassed an extra £180bn in their bank accounts, equivalent to almost 10 per cent of the UK’s annual gross domestic product.
With non-essential shops and services including hairdressers and gyms due to welcome back customers on Monday after a third lockdown in England, and pubs and restaurants also set to reopen their outdoor tables, economists and investors are trying to figure out how much of that cash will be spent.
The consensus is the easing of coronavirus restrictions will spark a surge in consumer spending, at least by wealthier households. But whether that triggers a lasting US-style Roaring Twenties frenzy of consumption, or a more shortlived summer of fun, is a subject of intense debate.
“There is disagreement in the economist community over whether or not savings will get spent,” said Karen Ward, chief market strategist for JPMorgan Asset Management. “I just think it will get spent.”
Boris Johnson hailed the easing of lockdown restrictions taking effect in England on Monday as a “major step forward in our road map to freedom”.
“I’m sure it will be a huge relief for those business owners who have been closed for so long, and for everyone else it’s a chance to get back to doing some of the things we love and have missed,” he added.
The scale of UK household savings amassed during the Covid-19 pandemic has not been seen in recent decades. At the peak in the second quarter of last year, more than 25 per cent of household income was left unspent, an increase of almost 18 percentage points compared with the end of 2019, according to official data. By the end of last year, the savings ratio was 15.6 per cent, well above the normal level of about 9 per cent.
The amount of cash sitting in bank accounts will have increased by £180bn between the start of the pandemic and June this year, according to an estimate by the Office for Budget Responsibility issued last month.
The UK fiscal watchdog said if the £180bn were to be spent over the next four quarters, it would add about 6 per cent to consumption both in 2021 and 2022.
“There may be a degree of euphoria once the pandemic is past, leading households to wish to treat themselves,” said the OBR. “Second . . . some durables spending, such as on cars, has been especially weak during the pandemic, and there is therefore scope for a strong rebound. Third, the additional household savings have been held primarily in liquid form, allowing them to be run down more easily.”
Standard economic theory suggests that people will spend 5 to 10 per cent of any unexpected windfall over the following year, but some experts said the figure could be markedly higher as Covid-19 restrictions are eased.
Precise estimates of how much consumers will spend are tricky, partly because there is no reliable statistical model for the cash accumulation witnessed in the pandemic. Large parts of the UK economy have been mothballed in the latest lockdown in England, although consumers have continued to spend online.
But the case for why there could be a consumption blowout is strong, reflecting how savings built up during the lockdowns have not been carefully squirrelled away for any particular reason.
“It’s about our historical propensity to consume [out of savings],” said Ward. “Historically, it’s quite low. But these are not normal savings. These are forced savings. When you are saving, it’s a long-term ambition for something like buying a house or school fees. Your propensity to spend that is quite low. But this is not normal.”
Andy Haldane, Bank of England chief economist, has been convinced since last summer that the unusual situation unleashed by the pandemic makes Britons likely to splash the cash. The economy is waiting “like a coiled spring”, he said last month.
The main case against a surge in consumer spending is that poorer households have not enjoyed the same accumulation in savings, and they are normally more responsive to changes in their financial conditions than the rich.
A BoE survey last year showed that unemployed people drained savings during lockdowns to make ends meet, while low-income households were roughly evenly split between those that have increased the money in their bank accounts and others that have run down their cash reserves. Wealthier households, by contrast, saved a much larger amount of their income.
One key reason economists and investors are uncertain on how Britons will respond to their new-found freedoms is the fear factor: some may be reluctant to spend partly because the government’s advisers have warned the world will be living with coronavirus for the foreseeable future.
Fabrice Montagné, chief UK economist at Barclays, said Britons will show “no urge to splurge”.
“We are likely to see one, two, three months of people really enjoying the summer, and a bump in credit card spending, but that does not mean people are going to spend 10 per cent of GDP in restaurants,” he added.
But evidence suggests many people are itching to go out and spend. The government’s Covid-19 vaccination programme has largely been successful, and when chancellor Rishi Sunak subsidised meals in restaurants last summer with his “eat out to help out” scheme, it proved extremely popular. Company surveys show a large number of pub and restaurant bookings ahead of reopening on Monday.
“A coiled spring? There has to be some of that,” said Eric Lonergan, a macro hedge fund manager at M&G Investments in London. “But whether we come out of this with renewed risk appetite or with additional caution . . . I just don’t know.”