A threat to recovery

Findings of recent surveys show that consumer sentiment has dipped in recent weeks after the outbreak of euphoria when lockdowns were lifted and consumers could once again visit pubs and clothes shops.

The Bank of England has noticed too. When Andrew Bailey, the governor, stunned the financial markets on Thursday by announcing that interest rates would remain at their record low of 0.1%, he pointed to signs of weaker consumer spending as a reason to delay the expected hike to 0.25%. Hopes have been resting on consumers to power the economy out of its deepest contraction in 300 years, as Covid restrictions eased. During those lockdowns, households amassed savings because, with shops and restaurants closed and holidays thwarted by travel restrictions, they could no longer spend in the usual way.

According to the Office for Budget Responsibility (OBR), the government's independent fiscal watchdog, those excess savings €”the total in people's bank accounts above normal €” amount to £180 billion, or an average of £6,474 per household. As the harshest of Covid restrictions came to an end this spring, the Bank of England and the Treasury wanted to persuade the public to start eating into their savings. Spend, spend, spend was the rhetoric. It has not yet happened. In fact, deposits with banks and building societies and cash saved in National Savings & Investments accounts rose by £9.4 billion in September, nearly twice the £4.8 billion average increase in the two years before the pandemic.

Rob Wood, chief UK economist at Bank of America Merrill Lynch, said it had to be assumed that the public was now saving by choice. And that could be a troubling behavioural trend when it comes to spending longer term. The OBR assumes that households will spend 5%of these extra savings each year for five years; the Bank of England assumes 10%will be spent over three years. Whether consumers spend this money or not is central to whether the Bank needs to hike interest rates. If households keep saving at this rate, the Bank does not need to hike rates. So the motivation of consumers is now facing scrutiny to establish when they might stop building up their savings and spend the cash again, or to gauge whether the habits developed during the lockdowns will persist.