Over 60% of the increase in GDP since 2010 has been driven by household expenditure.
While nominal household consumption has increased by 25% since 2010, gross disposable
income is up just 19%, with the financing gap bridged with unsecured leverage and a
drawdown in savings. The sharp collapse in the household savings rate is perhaps the most
striking confirmation of this trend. Any increase in the savings rate has normally coincided
with recessions.

Digging deeper into saving patterns further attests to the fragility of the household sector. By
aggregating data on long-term savings vehicles (term deposits, ISAs and the now defunct
TESSAs) and more liquid products (sight deposits and physical cash) it is clear that the
former has taken a hit since the financial crisis. The combination of low interest rates and
relatively weak income growth has eroded the incentive for locking up cash in long-term
savings vehicles. This myopic shift in financial planning is not confined to cash savings.
Flow of funds data shows that households have also been liquidating equity holdings, which
has been largely driven by a reduction in mutual fund investments.

In the near term, rising unsecured debt alongside weak income growth could prove to be
the Achilles’ heel of the economic recovery. Over the longer term, the drawdown in savings
risks further undermining productive investment, which has already been one of the biggest
causalities of the financial crisis.

Consumer credit in the UK in recent years has risen to take some of the strain off
the household sector.  However, as the large profit warning from Provident Financial
shows, borrowers are coming under increasing pressure to keep up with repayments.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception