Britain in record long-term savings raid

In this post-crisis era it’s not often one comes across economic statistics that genuinely surprise you. But tonight we at Sky News have reported one which most certainly did that for me.

According to our analysis of figures from the Bank of England, carried out with the help of Simon Ward of Henderson, one of Britain’s most expert economists, we’ve uncovered the fact that over the past year Britons have pulled cash out of their long-term savings accounts at a rate of approximately £900 a household.

The £23bn outflow of cash from savings accounts and cash ISAs is the fastest on record, a sign that Britons are resorting to mining their bank accounts in an effort to afford their spending during the economic recovery. This is a phenomenon which has been largely ignored by conventional economists, in part because they tend to focus far more on debt.

You can see the phenomenon in the chart above. The black line is the broadest measure of money in the UK economy, but look at the blue line: that’s a measure of the amount of cash in Britons’ long-term savings accounts. As you can see it’s been growing for most of recent history, but in the past year it’s slid sharply into negative territory. Meanwhile, the amount of cash held in current accounts and cash (the red line, which economists like to call M1) has risen very sharply, suggesting people are now shifting that cash into their pockets and into their instant-access accounts.

Above is a chart showing the annual changes in long-term savings figures looking back a bit further. As you can see, not until the most recent quarter has the annual change in deposits dropped by more than 10%. In the third quarter of this year it was -10.8%. Apologies for the gap in the line, which is due to a break in the data.

The flow of cash has two consequences – one broadly positive, the other about which people may be more equivocal. The good news is that it is likely to make the domestic economic recovery even stronger than had been previously reckoned – after all, that money needs to go somewhere. On the flip-side, the dig into savings may well be a consequence of the fact that households, facing the biggest real-terms earnings squeeze on record, are resorting to mining the money they set aside for the future in order to finance short-term spending.

Moreover, these figures underline the fact that people are being driven away from long-term savings by the paltry interest rates they get there. Figures also published by the Bank of England show that the average interest rate on long-term savings accounts has now dropped to 2.4% – the lowest level since comparable records began in 1999.

According to Simon Ward: “I think there could be a number of reasons why this is happening. One is that some households are obviously under financial pressure and are having to draw on their savings. Other households have seen that interest rates are very unattractive and so have decided to spend some of their hoarded cash.”

The news will need to be examined in more detail, however. This is the first substantive evidence we’ve had that Britons are pulling cash out of their savings at the fastest rate in modern history. Whether you’re reassured that people aren’t borrowing more and more, or you’re dismayed at the collapse of Britain’s long-term savings industry, the phenomenon is now too big to ignore.