Increased savings could be economically counter-productive, report indicates. Changing financial habits among UK households could put downwards pressure on overall GDP growth, the Bank of England has said.
According to the institution’s latest quarterly review of the UK economy, released today (September 21st), wealth levels among Britons could reduce further over the months and years to come.
This is due to an economic scenario known as the “paradox of thrift”, which occurs when consumers reduce borrowing and increase saving in a recession.
Instead of promoting economic growth, such trends can be counterproductive to an economic recovery as they reduce demand for goods and services.
As a result of these depressed growth rates, people have less money in their pockets and savings levels can actually decline over the long term.
The report explained: “Any attempt to reduce consumption is likely to push down on output and hence household incomes.
“That could actually make it harder for households to increase their saving.”
However, the Bank reiterated in its review that historical trends on the effect of recessions on savings were not clear and that the outlook remained “highly uncertain”.
Britain’s economic output fell by 2.4% over the first quarter of 2009 and by 0.8% over the second quarter.
However, more recent analysis from organisations including the National Institute of Economic and Social Research suggest that these declines might already have ended, with the UK returning to growth over the summer.
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