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Save and spend to save the economy

In normal times consumer spending – so us going about our normal business buying stuff – accounts for 62% of our country’s gross domestic product (GDP).

Some of that normal spending is paid for by borrowing and some from just savings and cash.

Then during the pandemic many people have saved a lot of money – and official figures suggest we’ve saved a whopping £238 billion over the last year and in 2020 as a nation we saved 16.3% of our disposable income, not far off treble our normal savings rate which was 6.8% in 2019.

The big question is what will people do after the pandemic: continue to save as that’s now their new habit: save some and spend some or blow the lot in a post pandemic frenzy?

To put that into context if people spend £35 billion of those savings, GDP will be boosted by 1.6% which is not far off our normal annual growth rate as a country. This is so important to our future economy that the Bank of England have set about predicting what we might spend and they have settled on 5% of the pent up savings over the next three years which I think is hugely pessimistic for the economy.

I reckon people will hit the ground running and hit the shops as soon as they can. Some people may continue to save and hold onto to some of their savings but many will just blow the lot and as a country it will help our economy bounce back more quickly. It’s an odd conundrum. We all need to save and invest that money personally if we want to become wealthy but we also need a buoyant economy in order to create wealth.

A buoyant economy boosts our three routes to wealth: it drives up property and share prices and also creates business opportunities.

On balance I vote for the individual and suggest each person save and invest for their own family and their own financial security and freedom – after all that will benefit them directly and will eventually benefit the economy as a whole and help the government with increased taxes and contributions.

It’s a complicated win-win and I can’t wait to see what actually happens.

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© 2019 Financial Investing Trading

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