UK national saving up despite household decline
Tuesday, September 28, 2010 at 01:26PM
Simon Ward

The big news in today's national accounts release is a fall in the household saving ratio to just 3.2% in the second quarter from 5.5% in the first (revised down significantly from 6.9%). This will increase fears that the recovery is at risk from renewed weakness in consumer spending as households attempt to rebuild their finances.

Such worries are overblown, for two reasons. First, the fall in the ratio between the first and second quarters partly reflected a large drop in dividend income, which is likely to prove temporary given strong corporate free cash flow. (BP suspended its dividend last quarter but is expected to resume payment in early 2011.)

Secondly, the fall in household saving was more than offset by a decline in government current borrowing and higher corporate retained earnings. Accordingly, the national saving ratio (i.e. the proportion of gross national income not consumed) rose in the second quarter, though remains low – see chart.

Encouragingly, companies are using higher saving to expand capital spending, circumventing the banks – business investment was revised up to show a 0.7% increase last quarter after a 7.9% first-quarter gain. The fall in government borrowing, meanwhile, may temper worries about future tax rises, encouraging households to maintain a lower saving ratio.

Article originally appeared on Money Moves Markets (https://moneymovesmarkets.com/).
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