Like it or not, you’ll soon be saving more…

From here, the ratio’s likeliest direction is upwards – and possibly sharply upwards.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Your investments may be about to receive an unexpected fillip – although you might not enjoy, or appreciate, the boost that your savings will receive.
 
How so? Look no further than the gloom surrounding the Chancellor’s Autumn Statement, which openly acknowledged the huge range of uncertainty surrounding the impact of Brexit on the economy.
 
And that’s before taking into consideration the prospect of Donald Trump in the White House, and the recent hardening of attitudes towards Britain seen among Europe’s politicians.
 
Donald Trump? Don’t forget that the United States is Britain’s largest export market – and the protectionist-minded Mr Trump is now its President-elect.

Tighten your belts

Paul Johnson, the director of the Institute of Fiscal Studies, put it starkly. The Institute’s projections, he observed, saw no growth in real wages for a decade.
 
“One cannot stress enough how dreadful that is ‑ more than a decade without real earnings growth,” he said. “We have certainly not seen a period remotely like it in the last 70 years.”
 
Moreover, he added, inflation-adjusted wages will be lower in 2021 than in 2008, with half the wage growth that had been projected prior to the Brexit referendum now not expected to happen.
 
You don’t need me to tell you that this isn’t good news. A rocky economy isn’t pleasant for anyone.
 
So why might it be good for your investments?

Inverse correlation

Let’s start with the savings ratio – that is, the proportion of household income that is saved, rather than spent.

Perversely, it tends to run counter to the economic cycle: when times are good, people spend a higher proportion of their income, and when times are bad, they save a higher proportion of their income.
 
Right now, the economy is relatively benign, and you’ll recall from the most recent GDP figures that it was higher than expected levels of consumer expenditure that buffered the anticipated economic shock that the referendum delivered. While businesses pulled in their horns, consumers carried on spending.
 
As you can see from the chart below, right now the savings ratio is at 5.1% – less than half of its level at the height of the recession in 2009.
 
Put another way, it’s only been this low twice since the early 1970s – the dotcom boom, and the 2005-2006 mini-boom delivered by a buoyant housing market and easy credit.

collective

Source: Trading Economics

Which way now?

So let’s return to that gloomy economic prognosis, and the coming decade of dampened economic growth.
 
Where do you think that the savings ratio is going to head next?
 
If you’re not sure, study the chart again, noting that when times are good it goes down, and when times are bad it goes up.

That’s right: the odds are looking good for a rising savings ratio.

Just in case

All of which means that you, me, and pretty much everyone else is going to feel that it might be prudent to put away a little more each month… just in case.
 
And I don’t know about you, but with interest rates likely to still be very low (although probably higher than today’s 0.25% Bank Rate), I won’t be squirrelling much of my extra savings into cash accounts.
 
Particularly as it’s likely that subdued economic activity will take some of the froth off share prices.
 
Meaning that there might be some tasty bargains on offer – just as in 2009. And, somewhere on the other side of all this, that could mean decent gains, and a decent income from shares that were bought while they were cheap.

Cheer up, it might not happen

Now, all of this comes with a few hefty caveats.
 
The Brexit negotiations might go swimmingly, for one. The Institute of Fiscal Studies’ economic forecasts might be wrong. Donald Trump might recant his protectionist policies.

And so on, and so on.
 
But the balance of probabilities, I feel, is on those caveats being somewhat unlikely.
 
The UK’s savings ratio can’t keep heading downwards. We will all, I think, soon be saving a little more.
 
So where will you invest your additional savings?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »