Stretched households could mean lengthy UK downturn, if it comes

LONDON (Reuters) – If Britain falls into recession soon, perhaps after a no-deal Brexit, it might prove to be a lengthy one because the country’s financially stretched households are unlikely to be able to lead a recovery.

Britain’s household savings rate – a measure of how much households save from their disposable income – stands close to record low levels.

Households have also been net borrowers for 10 quarters in a row, an unprecedented stretch in records dating back to the 1960s.

Their lack of financial headroom could spell trouble if a downturn hits, whether triggered by events at home or abroad.

“If a global economy side-swipe happens, households haven’t got those rainy-day funds to use,” Simon French, chief economist at merchant bank Panmure Gordon, said.

Bank of England policymaker Gertjan Vlieghe has said he was “concerned” that the low household savings rate could leave households vulnerable to shocks to their income or employment.

The data show why.

Many factors determine how quickly a country recovers from a recession, and the household savings rate appears to be an important one.

In the financial crisis, countries that entered recession with net household savings rates above their 10-year average recovered the fastest, based on data from Refinitiv and the Organisation of Economic Cooperation and Development.

Conversely, those entering the downturn with household savings rates below the 10-year average tended to take longer to recover their lost output.

Household savings and recovery from global financial crisis: https://fingfx.thomsonreuters.com/gfx/polling/1/611/607/household%20savings.png

Switzerland and New Zealand recovered fastest, within two years. Both countries entered recession with household savings rates in 2007 that were above their 10-year average.

By contrast, Spain, Portugal and Finland took longest to recover — around nine to 10 years — and had household savings rates furthest below their 10-year average in 2007.

Britain, which entered recession with a slightly below-average household savings rate, was broadly in the middle of the pack in terms of recovery time, at roughly 5 years.

The analysis excluded Australia, which avoided recession, and Italy and Greece, whose economies have yet to recover to their pre-crisis sizes.

The world’s fifth-biggest economy shrank in the second quarter of 2019 and the possibility of a no-deal Brexit has raised the risk of its first recession since the financial crisis, even if some of those concerns were eased last week when data showed output grew in July more strongly than expected.

On the plus side, wages in Britain are growing at their fastest pace since before the financial crisis, which should help to restore household finances.

But the broader picture still suggests Britain will need to lean on spending by the government to drive any recovery from a future recession.

Britain’s household savings ratio stood at 4.2% in 2018, up only slightly from the record low of 3.9% struck in 2017.

“The poor savings ratio for more than two years suggests rainy day funds are thinner in UK than in other G7 countries,” French from Panmure Gordon said.

UK household savings rate and recesssions: https://fingfx.thomsonreuters.com/gfx/polling/1/613/609/hh23.png

FISCAL FIREPOWER

The Resolution Foundation think-tank last week said Britain was not ready for a recession and proposed changes to the way it manages its economy to see off the downturn when it comes.

It called for a pipeline of shovel-ready infrastructure projects which could be sped up in a crisis and it said direct payments could be made to households if necessary.

Finance minister Sajid Javid has promised the biggest day-to-day spending increases in 15 years, a move widely seen as part of Prime Minister Boris Johnson’s push for an election to break the Brexit impasse.

He is due to announce new fiscal rules later this year.

“With government borrowing costs running at record lows and monetary policy lacking conventional ammunition to fight a slowdown in the economy, the economic case for a rise in public spending is a strong one,” Martin Beck, an economist at consultancy Oxford Economics, said.