Stresses Intensifying On Economic Lynch Pin #3

With incomes falling, the last resort for maintaining household spending are savings and borrowing.

• In the chart below we look at the Y/Y growth in ISA deposits and non-interest bearing sight deposits, with the former being a tax-free savings vehicle and a proxy for long-term saving, while the latter serves as a proxy for liquid cash balances.
• It is clear from the chart that UK households are now drawing down from long-term savings, while growth in cash balances held on sight deposit have fallen sharply.
• At the same time, credit card lending has been picking up, albeit having contracted during the pandemic. '
• The trends are still relatively embryonic at this stage, but could accelerate if inflation continues to push higher and wages struggle to catch up.
• BoE research has shown that savings accumulated during the pandemic have largely accrued to the highest income earners, with lower income earners not managing to significantly stockpile liquid balances. Although we have not seen any evidential data, it is likely that lower income earners will be the first to draw down cash balances and would be more likely to fully deplete savings to support purchasing power. Again, given the inverse relationship between income level and propensity to consume out of income, the draw down in savings is an ominous sign for household spending in the coming quarters.