Hey big spender: Why the economy needs you

Others are more cautious. Lingering fears about the virus and the threat of unemployment may cause people to hold on to their funds.

The bank expects anywhere between 5 and 10 per cent of those savings to be spent over the coming three years. That amounts to £7.5 billion. Analysts at the Centre for Economic and Business Research are more bullish, expecting that a quarter will be spent over the coming year.

“We would expect a good chunk of this will be splashed out over the summer, though it is hard to predict how quickly,” Kay Neufeld, economist at CEBR, said. “My best guess is that the losses from international travel will be roughly compensated for with people indulging themselves at home following a tough pandemic and a largely cancelled summer last year.” He said £22.75 billion of the excess savings would be spent between April and September.

Consumer spending is expected to climb 4 per cent between April and May and 4.5 per cent in the third quarter of the year, according to Capital Economics. Economists at Jefferies, the investment bank, said the increase in consumer spending over the summer would amount to a 1.5 per cent boost to GDP in both quarters.

There are signs that households are gearing up to spend. Real-time data from Jefferies shows visits to accommodation and hotel sites are at a near six-month high. Restaurants and pubs are reporting a surge in bookings over the coming weeks and the CEBR expects the hospitality sector to receive a £314 million boost next week alone.

A similar pattern played out last summer. When shops, pubs and restaurants reopened in July, consumer spending jumped 19 per cent between the second and third quarter of the year. Pent-up demand was bolstered by the Eat Out to Help Out scheme, which also supported spending in nearby shops and helped to lift retail sales by 3.6 per cent in July.

Paolo Surico, professor of economics at London Business School, said: “There is not such a thing now [Eat Out to Help Out] and therefore the mini boom on non-essential spending may be lower this time around.” The slump in spending has also been less severe during this lockdown as businesses have adapted better to the lockdowns and consumers have found new ways to spend, mainly online.

The Eat Out to Help Out scheme encouraged people to leave their homes last summer but lingering fears about the virus held many back. “But now more than 50 per cent of the population has got the first jab and more than five million have received both jabs, the fear of getting the virus is likely lower than in the summer of 2020,” Surico said.

However, the increase in spending will not be enough to take consumption to where it was before the crisis hit. Consumer spending will be down 4.6 per cent compared with the third quarter in 2019, according to Ruth Gregory at Capital Economics and it will take another year to return to pre-crisis levels.

In part, this is because some spending will simply be redirected from parts of the economy to others. A mini-boom on non-essentials will partly be funded from falls in supermarket and takeaway purchases.

There is also a cap on how much consumers can boost their spending on non-essentials. Andrew Bailey, governor of the Bank of England, recently said households would “go for it” when restrictions lift but few will feel the need to have their hair cut twice. If they choose to spend on foreign holidays or imported goods, such as new cars, the boost to GDP will be minimal.

Although the rate of savings will fall not all economists are convinced that the stock of savings will be used.

The Bank of England has emphasised that much of the excess savings are in bank deposits, of which households have tended to spend more in the past. However, some has ended up in the property market, which does not add to consumption in the national accounts.

Simon French, chief economist at Panmure Gordon, said: “If you look at recent activity in the housing and equity markets and more formalised savings products, a lot is going to go into stores of wealth, either in property or in pensions, or personal savings products.

“If that proves right, then we’re not going to get a massive consumer led rebound, we’ll get a reasonable one . . . and the government might look to encourage through tax those households to go out and spend rather than save.”

Haves and have nots

Economists hope the extra billions saved over the past year will fuel a consumer boom but not everyone is so flush.

Savings have been concentrated in high-income households while the poorest families are more likely to have fallen into debt.

Research by the Resolution Foundation shows that while 37 per cent of those in the highest income quintile banked more money last year, 54 per cent of families in the lowest income quintile were forced to borrow more to cover everyday costs such as housing and food.

So any spending boom will have to be driven by higher earners, a group that typically has a lower marginal propensity to spend.

The Bank of England says lower and middle-income households that have not accumulated a buffer of savings might aim to do so, which could weigh on consumer spending.

The Bank’s central forecast is that 5 per cent of these savings will be run down over the coming three years. Many economists believe it is being too cautious but comparisons with other countries indicate the final figure will come close to 5 per cent.