ISA Deposits Suffer Unprecedented Fall

Britons 'Draining Savings' To Stay Afloat

Updated: 7:21pm UK, Tuesday 03 June 2014

There's a received wisdom about what is happening in the UK economy. It goes roughly as follows: consumers are short on cash, their real incomes are falling and they are struggling to afford to keep their heads above water. So they are having to borrow to keep themselves afloat.

This borrowing is helping push house prices higher, which in turn is leaving the UK economy vulnerable to collapse.

It's a compelling notion, in large part because much of it is true. Apart, that is, from the central element.

Contrary to widespread assumptions, Britons are not borrowing large amounts in order to keep themselves afloat. In fact, borrowing levels remain strikingly low, according to figures from the Bank of England.

Instead, consumers are tapping into their savings at a record rate in order to finance themselves.

We have known as much since figures uncovered by Sky News late last year showed an unprecedented transfer of cash out of long-term deposits and into households' current accounts.

Our news that deposits in Britons' ISA accounts are falling at an unprecedented rate is the latest evidence of this trend.

On the one hand, it might be construed as a benign pattern: although some consumers might well be overpaying on their new house, at least they aren't borrowing enormous amounts to do so (though of course, at the margin some undoubtedly are doing precisely that).

The worry, though, is that Britons are already overextended as things are.

While the rate at which they are taking on debt is not increasing particularly quickly, it is questionable that they have paid back as much as is necessary following a long pre-crisis debt binge.

The hope is that this savings-fuelled recovery eventually transforms into a business-led recovery – but that would depend on housing market activity diminishing in the coming months.

That still shows little convincing sign of happening, which is why the Bank of England remains privately concerned about the direction the consumer sector is taking.

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