Consumers in the UK are cutting spending more than anywhere else in the G7

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Consumers in the UK have curbed spending more than elsewhere in the G7 since the pandemic, as high interest rates and fear of economic shocks pushed households to build savings rather than spend.

Since the start of the Covid pandemic in 2020, UK household spending has risen by just 1 per cent in real terms and fallen by 3 per cent on a per capita basis, even as inflation has fueled nominal spending.

In contrast, per capita spending rose by 12.7 percent in the United States, 5 percent in Japan, and 3.2 percent in Italy during the same period. Even in Germany, where consumers also cut their spending, the index rose by 0.2 percent.

This caution does not suit the nature of British consumers, whose spending represents about two-thirds of GDP and grew strongly in the six years before the Covid outbreak.

This puzzles economists, because household disposable income has been growing, even after taking inflation and rising tax burdens into account.

But instead of spending these gains, families hid them. The savings ratio, which rose to 10.7 percent in the second quarter, has been stuck in the double digits over the past year — well above its 2016-19 average of 5.6 percent.

Deciphering this puzzle is a priority for policymakers at the Bank of England. If consumers do not start spending soon, the central bank will need to reconsider its forecasts for growth and inflation, with consequences for the path of interest rates.

“We expected the savings rate to continue to decline, but we have not yet seen this happen in a sustainable way.” Catherine Mann, interest rate-setting officer at the Bank of Englandhe said last week, describing it as a “big decision” that makes the UK’s GDP outlook unusually uncertain.

Economists say a surge in savings after the Bank of England began raising interest rates aggressively in 2022 was expected. People with cash to spare Stack in Isas and other savings products Delivering better returns than they have for years. On the other hand, homeowners face sharp increases in their mortgage costs, so they try hard to pay off as much debt as possible before refinancing.

But Paul Dales, chief UK economist at consultancy Capital Economics, said this effect “should fade”. He now wonders whether there has been a more structural shift in behaviour, with people becoming more inclined to build barriers for a rainy day.

“It’s something a lot of people in the Monetary Policy Committee are thinking about,” Claire Lombardelli, deputy director of the Bank of England, said last month. “We have to be very aware of the risks of deteriorating demand. I think there is a particular risk in the mix of consumption and saving.”

It is difficult to understand what drives the savings ratio, because the figure is derived from estimates of household income and spending that have undergone larger than usual revisions since the pandemic. The latest estimates show that consumers spent more and saved less than previously thought in 2022, but cut back on spending in 2023 and 2024.

Mann noted that one reason this precautionary behavior was more entrenched in the UK than elsewhere was that the inflationary shock was also much larger.

“UK households have seen 12 years of inflation in just over two years… The cumulative increase in the price level not only ‘washes out’ consumer psychology when inflation returns to target,” she said, citing evidence suggesting consumers are becoming more price sensitive, especially in areas of discretionary spending such as hotels and restaurants.

But Michael Saunders, a consultant at consultancy Oxford Economics, said this “harmful” effect of higher inflation was unlikely to be the main reason behind the consumer decline.

“Uncertainty about inflation is probably a small part,” he said. “Economic uncertainty is high. People are worried about jobs, about the impact of artificial intelligence, about taxes. The only thing you know about your taxes is that they are going up.”

Long-term demographic trends may also contribute. Older people are more inclined to save, and Saunders pointed out that young people looking to buy a first property now need to save more money to build up a deposit.

Callum Pickering, chief economist at Bill Hunt, offers another reason why UK consumers are losing enthusiasm: they feel less well-off, after a three-year period in which low bond prices hit pension portfolios and house prices stagnated in real terms.

“We don’t have people bragging after a dinner party on a Friday night that their house prices have gone up by £25,000, so this is the time to do a roof extension,” he said.

Data visualization by Keith Fry