Macroeconomics: UK economy, IB Economics

Merry Christmas from the Guardian's Business Desk who report that analysts expect a relatively quiet season on the High Street as the cost of living crisis starts to bite. 

Higher mortgage repayments, lower savings, and higher than expected inflation are all likely to play a part in depressing consumer spending, and consequently growth. 

I'm not sure whether this should go here or in the Microeconomic section; either way, it's a nice reminder that for all the talk about interest rates, they are determined in a number of different markets, and the base rate need not be representative of wider interest rates. 

In this case, Which? magazine notes that despite base rates now being 4.5%, some savings accounts are still only paying 0.1% interest, which seems remarkably low. Of course, from the bank's perspective, the difference between the two rates is effectively their profit margin.

It seems as though there's greater incentive for saving: a rise in easy-access savings rates has increased the opportunity cost of consumption and is encouraging saving. Expect to see a rise in the savings ratio and, of course, a decline in consumer spending and, by definition, economic growth. 

The Bank of England's data suggests that there's been a net withdrawal of £4.6bn from savings accounts in the last month. I suspect that it reflects the impact of the cost of living crisis as households struggle to meet their existing financial obligations. 

And if this is happening it doesn't bode well for levels of consumption, and, by definition, economic growth.

The Resolution Foundation identifies the rather obvious implication of rising interest rates: higher mortgage repayments and lower spending elsewhere. 

Of course, for those people - and the latest data rather suggests that their are a surprising number of them - who own their house outright, it will mean greater returns on their savings. 

Having built up savings during the pandemic, consumers have run down two-thirds of those savings, and others have sought credit, in response to the ongoing cost of living squeeze. It's certainly one way of maintaining your lifestyle at a time of high inflation. 

Perhaps the most concerning factor about this is the fact that it's thought that much of this activity is involuntary.