Personal Savings According to the

Personal Savings According to the UK Office for National Statistics, household savings declined in the second quarter of 2010 from 5.5% to 3.2%. There are a number of reasons why this decline could have occurred. This paper will examine the different factors that influence household savings rates and will attempt to explain the recent decline in household savings. There are a number of potential influences of savings rates, most especially the state of the economy, which has had a tremendous impact in the past couple of years.

Additionally, the prices of consumer goods influences savings rates, and this factor hints that low savings rates a new norm, and that the increase in savings rates in the past couple of years is a blip caused by the poor economy. Once the economy begins to recover, the trend towards low savings rates will be restored. Factors Influencing Household Savings There are several factors that contribute to household savings rates. The general state of the economy is one significant factor that must be explored.

In 2008, before the economy went bust, the savings rate in the UK was 1.7%. This was the lowest savings rate in forty years, well below the historic average of 7.6% annually (BBC, 2010). By the second quarter of 2010 this had increased to 5.6%. The cause of the uptick was generally considered to be that difficult economic times, and especially layoffs, had convinced Britons to save more of their earnings. Borrowers paid down £7 billion in mortgage equity in Q2 2010, in contrast to economic boom times when consumers were taking out additional mortgages.

The fear of losing one's income and of having borrowed too much stimulated the large increase in savings rates over the course of the downturn (Stewart, 2009). That this trend has now reversed for the third quarter of 2010 could imply that the economic outlook is improving. However, economic growth in the third quarter was slow, at just 0.8% (Marketwatch, 2010).

It could be, however, that is was merely the perception of higher growth and a recovery economy that drove down the savings rate -- if savings was driven by pessimism then all it would take is optimism to reduce savings rates, not actually economic improvement. Shifts in household expenditure can also explain differences in household savings rates. In 1970, food and non-alcoholic beverages represented the largest spending categories for British consumers. By 2008, housing, water and fuel were the largest spending categories.

Given that it is a reasonable assumption British people are not eating less, this implies that those three categories of spending have seen abnormal rises in importance. Expenditure on these other goods and services has risen rapidly. This will impact savings rates because as other expenses increase to take up more of consumers' budgets, this may indicate that less money is available for savings (BBC, 2010). There are also macroeconomic factors that may contribute to lower savings rates.

Inflation erodes the ability of consumers to save when their wages do not increase. The Retail Prices Index increased 4.6% in September, indicating that there is some inflation in the British economy. For those on social services, payments were reduced as the result of adjustments to the payout formula. With only minimal job growth in the quarter (9000 new jobs), wages are unlikely to have risen significantly. Overall, this could have resulted in less money among consumers for savings (BBC, 2010, 2). Interest rates are another factor.

The returns on savings are low, so that consumers are unlikely to save anything beyond what they feel they need in their nest egg or rainy day fund. Current rates are savings account are not sufficient to cover inflation, so there is no economic motivation for consumers to save beyond basic security. There remains stock market turmoil amid the various crises around Europe, so markets provide an uncertain mechanism with respect to savings as well.

Ultimately for consumers to save they need financial incentive and in the current financial markets that is not forthcoming. Recent Changes Consumer pessimism about the economy will typically lead to increased savings rates as consumers feel as though the need to build up a nest egg. This led to a spike in savings rates over the past couple of years. That these rates decreased in the third quarter of 2010 may be indicative of a return of consumer confidence.

With job losses stabilized, even with little sign of actual economic growth, consumers who have been saving for two years may feel as though they have enough saved, and begun to spend again. This is especially likely because current interest rates on savings are low. Thus, there is no financial motivation to save for UK consumers at present.

Some are still saving, largely because they may feel that they need to, that the economy has not recovered sufficiently for them to feel confident, but other consumers may be feeling more confident. Another possibility is that low housing prices and cheap money are beginning to encourage more Britons to get back into real estate. After some difficult times when nobody trusted the real estate market, Britons have possibly begun to realize that real estate a good investment.

Indeed, the market has improved lately, and in spring of 2010 there were signs that new supply was entering the market. Price growth was tempered and this is likely to have spurred are return to real estate investing in the quarter that could have had an impact on savings rates as a result (Property Wire, 2010). There is also the question of seasonality. Savings rates may still be trending high, but the third quarter mirrors the summer season.

Consumers may simply have chosen to save less during the summer in order to spend more on their vacations. If that is the case, the savings rate should return to its higher levels with the coming of the colder weather. In the next couple of quarters, it should be apparent whether the decline in savings in the third quarter of 2010 was a blip caused by summer vacation spending, a resurgence in real estate investing, or perhaps is indicative of a long-term trend.

The Trend I expect the trend towards declining savings to continue. In general, recent years have demonstrated that savings rates are overall heading down. The cost of many consumer staples has increased beyond the rates of inflation or wage growth, and this has led to an erosion of consumer capacity to save. This trend can be seen not only in Britain but in the U.S., Japan and other developed nations as well.

Consumers are turning increasingly to credit to fuel their lifestyles, and this is causing significant long-term declines in savings rates. There is no reason to think that this trend will not continue. There are reasonable, rational reasons why savings rates have increased over the past two years. Fear over the economy lead consumers to better manage their personal debt levels, and to build up savings as a hedge against potential unemployment. However, the cost increases that are the underlying cause of the long-term savings rate decrease have not abated.

There are already inflationary pressures in the UK, certainly in relation to the overall economic outlook. Consumers may also have enough money saved after two years of limiting spending. Consumer optimism may be increasing as well, with the sense that the economy is going to improve soon, or at least will not get any worse. The reduction in savings rates in the third quarter of 2010 may have been temporary,.