Coronavirus pandemic led to £140bn-worth of ‘forced saving’

More than £140 billion-worth of household saving during the coronavirus pandemic was “forced” amid a lack of spending opportunities, the Office for National Statistics (ONS) has estimated.

Around three-quarters of the increase in household saving during the Covid-19 crisis was the result of forced saving – amounting to more than £140 billion or around 10% of annual household disposable income = the ONS said.

People often save to give themselves a protective buffer in case they have a big expense or a sudden drop in income.

The ONS said: “The pandemic introduced another reason – saving forced through the inability to consume following government restrictions on physical movement and social interaction.”

The sharp rise in household saving coincided with government-imposed curbs on social contact and economic activities, resulting in significantly reduced household spending.

Household saving in the UK as a proportion of household resources – known as the household saving ratio – peaked at a record 23.9% between April and June 2020.

This compares with a household saving ratio of just 6.0% between October and December 2019, before any lockdown restrictions were imposed.

The household saving ratio remained elevated before falling to 6.8% in the last three months of 2021.

The ONS estimated the total accumulated increase in household saving relative to the level in the final quarter of 2019 was £195.9 billion.

Of this, “forced saving” accounted for £144.9 billion – or around 74% of the build-up in household saving during the pandemic.

Reduced spending in restaurants, hotels and on transport have been the main drivers of the overall fall in spending since the start of the pandemic, the ONS said.

“High contact” industries reliant on physical interaction were particularly badly hit by restrictions, including the retail sector, transport, accommodation and food services, and the arts, entertainment and recreation sectors.

While the sharp increase in the saving ratio was helped by the suppression of opportunities to make purchases, the increase may not be just due to forced behaviour, the ONS said.

It also highlighted the desire to maintain a given level of savings to act as a buffer as a precaution against an uncertain future, as well as the desire to save as a response to changes in income expectations.

For example, the fall in spending at restaurants during the pandemic may also have reflected lower expectations of future income and increased uncertainty.

The ONS also pointed to “a very large increase in the interest rates charged on overdrafts (and other forms of unsecured consumer credit), which would be expected to increase the saving ratio”.

Some big providers charge around 40% for overdrafts, following rule changes on how they can charge people for going into the red.

Looking ahead, the household sector may look to unwind the accumulated saving relatively quickly, and the saving ratio has fallen in recent quarters as forced saving behaviour has gone into reverse, the ONS added.

On the other hand, the scope for spending may be restrained – as missed consumption opportunities during the pandemic were largely in services such as hotels and holidays where the potential to catch up is limited.

Another factor is how the increase in saving is distributed across households, many of whom are now being squeezed by high living costs.

The ONS said analysis by researchers from the Bank of England found 42% of high-income households reported an increase in saving compared with 22% of low-income households.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “We know that people who earn more tend to hold on to their savings for longer, because they can meet more of their additional spending from income. It means there’s no compulsion to spend.

“It’s why our research showed that in April this year a third of people still hadn’t spent any of their lockdown savings, and higher earners were even less likely to have dipped into them.

“Unfortunately, this doesn’t mean we’ll continue to hang on to this cash, and protect our financial resilience. When we asked people where the money had gone, just over one in four people (26%) said they spent at least some of the money on everyday costs like paying bills.

“It has been incredibly useful to have a cash cushion as prices have started to rise, but the risk is that if they haven’t been able to cut their costs at the same time, people will be spending their way through their savings.

“When this runs dry, they’ll still fall short at the end of each month, and they’ll have eroded their financial resilience in the interim.”

Laith Khalaf, head of investment analysis at AJ Bell said: “The fact wealthier households have some spare cash following the pandemic may make them less demanding of wage increases to cover higher energy bills, which could actually prove helpful for inflationary pressures in the longer term.”

Myron Jobson, senior personal finance analyst at interactive investor said: “The escalating cost-of-living crisis means that those who were fortunate enough to become accidental savers won’t be able to spend their bumper savings how they would have envisaged once Covid restrictions were lifted.

“Hanging on to this cash seems increasingly unlikely for many, with the cost of everything rising.”