Lockdown savings ‘likely to be spent slowly’

Many households in the UK put more money aside during lockdown as spending opportunities were reduced. As restrictions curtailed people’s spending on shopping, entertainment and holidays, household savings rose on average.

However, this is unlikely to lead to a temporary consumption boom, according to a new analysis.

The research, funded by the Nuffield Foundation, used both aggregate and household-level data and revealed that:

1. Falls in spending during this recession were primarily in purchases of services rather than durable goods. While purchases of durables are more likely to be postponed rather than cancelled, purchases of services such as meals out and holidays are less likely to increase much next year because less was spent on them last year.

2. Increases in net wealth over the pandemic were more common among higher-income households, who were less likely to experience economic uncertainty and income losses during the pandemic, and so are less likely to change their spending behaviour as the economy recovers.

3. Responses on how individuals would respond to a hypothetical payment of £500 suggest low desire to spend more as incomes increase. On average, only £55 of these payments would be spent over the next three months, indicating that the appetite to spend out of income growth is not unusually high. Richer households were more likely to say they would use the extra funds to add to their savings, while poorer households were more likely to say they would use the funds to reduce their debts.

The researchers noted that consumption growth in the next few months is still likely to be rapid as demand and household saving return to pre-pandemic levels. However, the fact that additional savings accumulated during the pandemic are likely to be drawn down slowly limits the degree to which consumer spending will drive both the recovery and inflation in future.