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How our thirst for spending has cut savings

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There were lots of nuggets about the state of the economy that have emerged and just about none of them are very encouraging.

GDP growth has been confirmed at a limp 0.2%.
Household disposable income has fallen, which may not come as a big surprise at a time when inflation is comfortably outpacing the rise in our wages.
But the figure that jumps out was the fall in the savings ratio, the measure of what percentage of our income we’re putting away.
It’s tumbled to just 1.7%, which means that of every £60 that the average person has to spend, just £1 is getting saved.
That is the lowest figure since records began in the 1960s.
:: Spending power in longest decline since 1970s
Not only that, it’s the lowest figure by a country mile, having fallen from the previous record low of 3.3% in the previous quarter.
Yup, you read that right.
In more than half a century of keeping track of the savings ratio, the previous low came in the previous quarter, and was very nearly double the percentage now being seen.
Look on a graph and the line linking the last three quarters seems to fall almost vertically.
So what’s going on?

Image: Credit card balances can easily be transferred from one card to another
Well the Office for National Statistics, which comes up with these figures, said they have been affected by two main factors – taxes and consumer spending.
There has been a £5bn spike in the amount of money we’ve been paying out in income and capital gains tax, and there has also been a £2.8bn increase in what the ONS refers to as “final consumption expenditure”.
And what are the main things driving that?
Buying cars, filling them up with fuel, staying in hotels and eating out at restaurants.
In other words, not the sort of things that suggests that the country is drastically cutting back its expenditure.

So we have a curious picture.
On the one hand, inflation is outstripping wage growth and the real value of our earnings is going down.
We’re in a “wage squeeze”, which really should be pushing us to tighten our belts and slash spending.
On the other – consumer spending is still going up a lot faster than either wage growth or the speed of national economic growth.
Consumer debt is rising, whether in the shape of overdrafts, car loans or credit card balances.
It’s never been easier to transfer a credit card balance from one provider to another.
Interest rates are lower than ever.
So we still seem to be spending rather like we have done for years, but now we’re starting to rely on easy credit to carry the burden of that expenditure.
And the thing we’ve forgotten to do is to put aside any more for a rainy day.
It may be that, despite the arguments over austerity, slowing growth and public sector pay caps, we are feeling confident.
Typically, a confident, optimistic population saves less than an anxious one.
It might be that we’ve decided that rates are so terrible that it’s just not worth saving in the first place.
But it might also be something else – that temptation to live for the moment, and not worry about the future.
Which sounds beguiling, but does leave the economy open to risks when something huge happens.
Because let’s be honest – if another financial crisis suddenly erupted, that feeling of confidence might just disappear as quickly as our wafer-thin savings.

Source: SKY News