Vantage Point: Volatility  

Could the UK avoid recession this year?

One of the legacies of the pandemic has been that, as we enter a period of economic turbulence, household balance sheets are in much better shape than is typically the case as recession nears.

Recessions often happen after a period of what Alan Greenspan, a former Federal Reserve chairman, calls “irrational exuberance”, where consumers and stock market investors take on new debt or reduce their savings rate beyond normal levels as they feel extremely confident about the economic outlook.

If a recession then occurs, many consumers and investors find themselves indebted just at the time when banks are less keen to extend credit, and when their employment or income prospects are diminished. 

This means that even as economies emerge from the recession and the prospects of the consumer and businesses improve, economic growth may be held back by the need to repay debts, and for banks to repair their balance sheets. 

This may be said to hinder the pace of the economic recovery, as much of the extra wealth is not spent now.

What makes the present economic situation different is the recession that resulted from the pandemic was caused not by a dissipation of savings but an excess of savings, as lockdowns meant people could not spend. 

Data from The Office for National Statistics estimates that household savings rose by 12 per cent during the pandemic.  

Research from Investec Bank calculates the average UK household had excess savings of around £4,000 coming out of the pandemic. 

Myron Jobson, senior personal finance analyst at Interactive Investor, says: “The assorted Covid lockdowns and social restrictions forced us into frugality, with household savings as a proportion of household resources hitting a record high at the height of the pandemic disruption. However, this doesn’t tell the full story.

"The ONS says consumers saving up in anticipation of a change in income or wealth and for a rainy day have also contributed to the revival of the nation’s savings culture. However, both these motives don’t appear particularly strong, accounting for 0.5 and 1.5 percentage points respectively towards the increase in the savings ratio in Q2 2020, compared to Q4 2019.

"In comparison, forced savings – those resulting from lockdown restrictions – were responsible for a whopping 11 percentage point increase. It is clear that the pandemic resulted in a seismic shift in savings behaviour.

>TheGFK measure of consumer confidence has fallen to minus 38. It was only once weaker at minus 39 during the financial crisis.---Gerard Lyons, Netwealth

"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 onto this cash seems increasingly unlikely for many, with the cost of everything rising.”