One of the long-running criticisms of the UK economy is that it is too dependent on consumer spending. Britons, so the argument goes, are too eager to borrow and spend and don’t save enough. For most of the last half century or so, consumer spending has indeed outpaced wider growth in the economy. No longer.

Ever since the pandemic consumer spending has grown more slowly than the wider economy. Despite a strong recovery in activity this year consumer spending remains lacklustre. In the first six months of the year, GDP expanded at twice the rate of consumer spending.

Britons seem to have acquired the savings habit. Households saved 11.3% of their income in the first quarter of this year, the latest data available. Outside of the pandemic, when lockdowns restricted people’s spending and enforced high levels of saving, this is a level of saving more normally associated with recessions or big squeezes on consumer spending. The old characterisation of spendthrift Britons looks out of date.

A move to a more sober UK consumer has been a long time in the making. In the wake of the financial crisis of 2008-10, regulators tightened criteria for mortgage lending which accounts for roughly 90% of all consumer borrowing. With mortgages harder to come by, consumer borrowing slowed reversing the seemingly inexorable rise in the burden of debt. The ratio of consumer debt to GDP hit a peak of 110% in 2010 since when it has dropped to 80%, a 20-year low.  

The pandemic added another major dampener to consumer spirits. Consumer spending dropped at record rates and savings surged. Consumer activity recovered from mid-2020 but at a slower rate than the rest of the economy. While GDP today is 2.3% higher than on the eve of the pandemic, household expenditure is 1.3% lower. In the last four and a half years British growth has been driven by government spending and investment, not by consumers.

Unlike in the US, where consumers seem to have spent their pandemic-era savings, Britons are hanging on to them. How can we explain the difference in behaviour?

Most of the pandemic-era surge in savings in the US was a product of  federal government handouts and increased welfare payments. In the UK savings rates rose because consumers made big reductions in their spending. (British consumers cut spending by 25% in the first six months of the pandemic; over the same period US consumers reduced spending by just 10%.) The Office for National Statistics (ONS) suggests that US consumers saw excess savings as a windfall gain to be spent in an economy that has seen a strong recovery. In the UK higher savings were harder earned and, against a backdrop of lacklustre recovery, consumers have held on to them.

Not only are British consumers hanging on to past savings, they are continuing to save an unusually high proportion of what they earn. More than three years after the ending of all pandemic restrictions, levels of savings are, according to the ONS, running at 11.3%, more than three times US levels.

It is indicative of the change in mood that homeowners are paying down mortgage debt. Through the 1980s, 1990s and early 2000s homeowners tended to borrow against their property, using their homes as security for low-cost credit which was often used for home improvements or major purchases such as buying cars or holidays. Twenty years ago, in the first quarter of 2004, households borrowed the equivalent of 6.9% of their total post-tax income, a huge amount, through so-called mortgage equity withdrawal. For years this form of borrowing acted as a major factor in driving consumer spending and growth. Since the financial crisis mortgage equity withdrawal has gone into reverse. Consumers are using their savings to pay down mortgages. In the fourth quarter of last year repayments of mortgages hit an all-time high, equivalent to 5.3% of GDP.

What conclusions can we draw from all this?

First, the UK household sector balance sheet is in better shape than for years. Debt levels are down, savings rates are up and consumers seem to have held on to much of the money they saved in the pandemic. This strengthening of balance sheets means that the UK is likely to be less prone to boom-bust cycles.

Second, despite a stronger overall position significant numbers of households are in a fragile state. Lower-income households have few, if any, savings or assets. Rising house and equity prices don’t help them. Soaring prices, especially for food and energy, have hit low-income households hard. Meanwhile mortgage payers face a continued feed through of past interest rate rises to their monthly bills. Earlier this year the Resolution Foundation noted that levels of food poverty and material deprivation have risen in recent years. There are a record 2,900 food banks in the UK.

Third, a period of sustained growth in consumption is in prospect. The economy is on a recovery path and lower inflation is boosting real incomes. With the economy growing and interest rates heading down consumers are likely to cut back on saving and spend rather more. Yet UK consumers are unlikely to give up on the more sober habits of recent years. A return to the sort of consumer booms of old is not on the cards.