Britons ‘shift from savers to borrowers’ amid cost of living crunch

interactive investor comments on the ONS Covid impact on income and spending study.

• After the largest quarterly contraction on record of 20.5% in Quarter 2 (Apr to June) 2020, household expenditure is now 3.6% above its pre-coronavirus (Covid-19) pandemic level in Quarter 4 (Oct to Dec) 2021, new data by the ONS reveals.
• Household income remained above pre-coronavirus pandemic levels throughout 2021.
• Household bank deposits saw a £65.6 billion decline in 2021, likely because of increased spending opportunities and consumer confidence.
• This followed a record rise of £126.9 billion in household deposits in 2020, as there was an increase in forced savings in response to coronavirus pandemic restrictions.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “We became a nation of savers during the pandemic as a result of strict lockdown restrictions and being unable to spend in the same way as before – reversing a three-year trend of households borrowing outstripping savings.

“However, further easing of Covid restrictions in 2021 resulted in the unleashing of pent-up demand, which saw net household savings half from the level in 2020, and household spending continued to increase thereafter.

“The Bank of England’s recent Money and Credit reports suggest that households have reverted to being net borrowers. Consumers borrowed an additional £1.4 billion in April alone as the cost-of-living crisis bites. Rising prices means that hanging on to cash is becoming increasingly difficult, and many of those who were fortunate enough to become accidental savers will be left with little option but to raid their lockdown savings to cover additional costs.

“With runaway inflation and rising interest rates, things are going to get worse before they get better for consumers. The need to build and maintain a cash buffer has become increasingly important - three month’s salary worth is a good rule of thumb, if not more.

“Those with high levels of debt should consider what they can do now to reduce their debts as the cost of credit is only rising just as the prices of everyday essentials are flying.”