Debt reduction

StevieJ

UK savings ratio is likely to shoot up to 7.1%, at that rate it will not take long to rebalance the economy and allow banks to start lending (reasonably sensibly) again

Low rates are providing a bonus for borrowers, bringing big reductions in mortgage payments. More generally, low inflation — helped by the government’s temporary Vat cut — will provide a boost to real income growth. Just how big was underlined by the National Institute of Economic and Social Research in its latest review.
It predicts real household disposable income will jump 3.3% this year, well up on last year’s increase of 1.5% and 2007’s zero growth. If this is right, it will be the best year for income growth since 2001. We will not have had it so good for a long time.

The question is: what will people do with it? Simon Kirby and Ray Barrell, economists at the institute, are pretty sure they will not spend it. Alongside that 3.3% rise in incomes they predict a 3.8% slump in consumer spending. Saving, not spending, will be the watchword this year, they say, with the saving ratio predicted to jump from 1.3% last year to 7.1% this year

http://business.timesonline.co.uk/tol/business/columnists/article5684012.ece

Generali

StevieJ wrote: »

UK savings ratio is likely to shoot up to 7.1%, at that rate it will not take long to rebalance the economy and allow banks to start lending (reasonably sensibly) again

Low rates are providing a bonus for borrowers, bringing big reductions in mortgage payments. More generally, low inflation — helped by the government’s temporary Vat cut — will provide a boost to real income growth. Just how big was underlined by the National Institute of Economic and Social Research in its latest review.
It predicts real household disposable income will jump 3.3% this year, well up on last year’s increase of 1.5% and 2007’s zero growth. If this is right, it will be the best year for income growth since 2001. We will not have had it so good for a long time.

The question is: what will people do with it? Simon Kirby and Ray Barrell, economists at the institute, are pretty sure they will not spend it. Alongside that 3.3% rise in incomes they predict a 3.8% slump in consumer spending. Saving, not spending, will be the watchword this year, they say, with the saving ratio predicted to jump from 1.3% last year to 7.1% this year

http://business.timesonline.co.uk/tol/business/columnists/article5684012.ece

If the savings rate jumps from 1.3% to 7.1% that implies an initial cut in GDP of 4% (70% of GDP is consumption, 70% of 5.8% is about 4%).

Then there will be a secondary impact (normally assumed to be about the same) as people lose their jobs.

Eventually (18 months to 2 years?) the higher savings rate should translate to higher lending leading to more investment and an increase in GDP perhaps a year later.

So maybe 2.5-3 years of recession with 8-10% off GDP.

NB All the above is a guess but it does follow a certain logic in a back of fag packet kinda way.

StevieJ

Some of the extra savings comes at the expense of reduced cost of imports e.g. oil, food, some reduced interest rates (implies less spending by savers ), also the loss of jobs could be in the likes of China (yes there is and will be jobs going here as well) so I don't think the recession would be as bad as you indicate.

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I don't think a huge amount of people are saving or spending, I think most people are worried about the huge debts they have, whether mortgage or unsecured debt and are looking at their job security and trying to pay these debts down, as the fear of unemployment grows.

StevieJ

ad9898 wrote: »

I don't think a huge amount of people are saving or spending, I think most people are worried about the huge debts they have, whether mortgage or unsecured debt and are looking at their job security and trying to pay these debts down.

I think saving is the same as paying debts down in this context, I may be wrong though.

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StevieJ wrote: »

I think saving is the same as paying debts down in this context.

Fair point, I also think the big question that is still unanswered at the moment is oil. Due to the global recession, demand has dropped through the floor, as has the price, which is to be expected. However were we glimpsing into the near future last summer when it was $148 p/barrel of peak oil, or not ? I suspect we were, however others have different opinions

This answer to this will have huge ramifications around the globe. Will we see an explosion in the price again as we move out of recession, causing inflation and ultimately back into recession, or not ? It will remain unanswered until the economy starts growing again. Time will tell.

Generali

StevieJ wrote: »

Some of the extra savings comes at the expense of reduced cost of imports e.g. oil, food, some reduced interest rates (implies less spending by savers ), also the loss of jobs could be in the likes of China (yes there is and will be jobs going here as well) so I don't think the recession would be as bad as you indicate.

As I say, it's purely a back of fag packet calculation. To expand on it.

GDP = Private consumption + Investment + Government Spending + Exports - imports

The 'marginal propensity to import' is about 30% - that is a GBP1 change in income will bring about (at the margin) a 30pence change in imports.

Consumption is about 70% of GDP.

So spending falls by 5.8% because of an increase in savings.

4% is sliced off GDP in consumption.

1.75% is added on through reduced importing.

So an initial drop in GDP of 2.25%.

Implying a 4.5% drop in GDP including secondary effects.

The Government is running a big deficit. That should be offset by a drop in investment on a pound-for-pound basis (crowding out).

That leaves exports. Exports fell by GBP1,200,000,000 or 0.05% of GDP for the last month for which stats are available. It remains to be seen by how far exports will fall. A falling pound implies higher exports, lower imports and further reduced consumption. The further reduced consumption will complicate matters.

In UK GDP figures I believe that buying houses is included under the investment category for the purposes of GDP calculation. Presumably that's taken quite a knock too. I don't have a simple guesstimate for it but will try to think of one.

Time will tell what will happen.