Professor John McHale:

On the subject of savings, economists can be schizophrenic. In the long term, savings are good because the amount of investment is very much linked to the amount of savings a country does over long periods of time. In the short term, an increase in savings and a reduction in consumption can be a major contractionary drag on the economy.

We spoke earlier of this balance-sheet recession, part of which has been a big rise in savings as householders try to repair their balance sheets. They also became more concerned about the future so they engaged in more precautionary savings, trying to protect themselves - just as we talked about the State trying to protect itself. We therefore saw a huge spike in the savings rate which was a major recessionary force.

We are starting to see the savings rate come down but it is still at elevated levels compared to what it was going into the crisis. The likelihood is that as confidence returns, and if the kind of momentum we discussed earlier continues, it should fall further. A lot of interesting international work has been done by examining the US savings rate which had also gone to very low levels pre-crisis. They do not anticipate that it will return to those levels. It will come down from the current elevated levels and that is already happening. I would anticipate therefore that as long as the good momentum continues, there should be further falls in the savings rate that will boost consumption as well as further boosting the economy, disposable incomes and employment. It will get a virtuous cycle to work, but I do not anticipate that the savings rate will go down to the lower levels, as was the case pre-crisis.