Andy Haldane at the Bank of England is saying that savings made in the last year could all flood into the market in 2021 and start a 'roaring 20s' boom.
I gather the Resolution Foundation (cut from similar cloth to Haldane) think much the same.
I beg to differ. First, some history:
Pent up demand in 1919 did not lead to sustained growth. The 20s did not roar in the UK. Not did the late 40s, although of course, rationing did not help then.
Nor is this likely. As I noted recently:
For me the most important chart in any economic forecast is that on the sectoral balances. This says who is going to save, and who is going to run a deficit. And there are only four sectors - the government, business, households and the overseas sector. The chart reflects an accounting identity - the data has to balance (as is true in reality) but where it balances is a critical indicator of the truth or otherwise of any forecast - and indicates whether it is plausible or not.
This is the OBR forecast, just published:
As I noted earlier today, the government deficit is matched by a massive rise in household saving this year. But it is assumed that by the end of 2022 households will hardly be saving at all.
How likely is that? Look at household behaviour after 2009 as an indication: savings remained high, and much higher than is now being forecast for 2022 onwards, until 2016. Given all the uncertainties that now exist, I suspect a 4% ratio likely, at least, for a long time to come. That is much higher than forecast, and means spending in the economy will be much lower than the OBR predicts.
Look too at the foreign sector. Will its savings in the UK grow after Brexit, as the government assumes? Why would that happen? And again, note they fell for four years after 2008 - so there is no reason for thinking that anything will be different now. I think a percentage or two could be knocked off that.
And look too at the corporate sector - where it is forecast that the sector will invest on a more consistent and at a higher level than it has for some time from 2021. But look at 2009 to 2013 and it saved during that period. As it will also do now.
In other words, all these forecasts look to be wildly overstated. And that means there must be a counterbalancing entry, and that is in the government deficit. That will not be 4% from 2022 on (which is about £90 billion a year). I think it could be 4% or more higher than that. I suspect a deficit of £200 billion a year much more likely.
I see no reason to change my mind. Certainly, some foolhardy people risked coronavirus at the weekend - and will no doubt do so over Christmas. But for the majority, the animal spirits are muted. And the savings that Haldane and the Resolution Foundation note exist are horribly imbalanced towards those with wealth - who tend to accumulate and not spend. That's why they are wealthy.
So do I see a rush back to normal amongst a wary population who see only unemployment and economic crises on the horizon in 2021? No, I don't. I see anything but that for most people, and those who will spend will not do enough to address the issues we face, even if they can get hold of the goods they want, many of which will be stuck in a container, somewhere.
The chance of a roaring start to the twenties looks remote to me.
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I used to have time for Andy Haldane – he gave an alternative to the dull, official “Bank view”. However, in recent times he has taken this beyond “being questioning of the conventional wisdom” to being “deliberately controversial to raise profile”. That is a shame. Your analysis is correct.
I would ask “who has been saving?”.
Furloughed or laid-off workers have not – they have, if anything, run up (more) debt. A return to “normality” will bring MORE saving (debt reduction) from this sector.
The well-off have spent less on eating out and holidays (but not on other things). I doubt they will eat two dinners a day to make up for the lost year of dining out. Besides, empirically, we know their spending does not vary much with income/wealth in any particular year.
In the middle is very patchy, many will have looked into the abyss and will build precautionary savings but I do accept that many younger folk might splurge.
Overall, I think that the raised savings rate will be with us for a while and at a higher level that 2008. 2008 was a banking crisis that passed many folk by almost unnoticed (as a banker, I find this hard to believe but when “I get out more” it really is the case). COVID has effected everyone in a way that 2008 did not.
Agreed, to all that
In fairness, what else is he going to say? He’s not there to tell the truth, he’s there to justify the status quo. The truth is, we are sleepwalking into the biggest employment crisis in living memory, 6 million unemployed (and intractably so), millions more barely employed, credit defaults and repossessions all over the place. It’s going to be a catastrophe. In the face of this what else can he do but put out platitudes about pent up demand, in some facile attempt to hold back a tidal wave of gloom, with a smile and a song.
Le déluge is coming, and it’s going to be a big one.
Thanks for your Sectoral Balances Accounting information, very good. With the advent of Covid it would almost seem to make sense to add that in as a “joker variable” line on the graph given that we don’t know how long the vaccines will last for or whether Covid will mutate sufficiently to put us back at square one. Nor for that matter do we know how global trade wars will pan out. Barge economics also still seems to be very much in play despite Trump:-
https://archive.commondreams.org/view/051700-108.htm
Look at Chart 4.02 showing the UK’s National Debt and ponder the effect monetary system illiteracy had the course of the UK economy:-
https://www.ukpublicspending.co.uk/debt_history
Supply isues mean we’re going to be seeing a lot of empty shelves, not just in shops but on Amazon and Ebay too. What does Haldane strangely imagine people will be buying?
……and then he woke up!!