Page last updated at 10:25 GMT, Monday, 21 September 2009 11:25 UK

'Years needed' to rebuild wealth

Piggy bank, notes and credit cards
Changes in saving could affect the economic outlook

Years of saving would be needed to return household wealth to pre-recession levels, a report by the Bank of England suggests.

If households saved 10% of their income, it would take nine years to bring wealth back up to the average of the last 20 years.

The Bank's quarterly review reported that householders' decisions on saving could affect the economic outlook.

However, history provides no "clear guide" as to how they will react.

"It is difficult to assess how much, if at all, households might seek to rebuild their wealth," the report said.

Saving habit

The largely theoretical report found that the ratio of household saving to spending fell between 1995 and 2007 to historical low levels.

Households may respond by increasing their precautionary saving
Bank of England report

Falling interest rates, easy access to credit, rising asset prices - such as property values - and economic stability meant people were more tempted to spend than save.

But the financial upheaval of recent times has reversed many of these trends, as well as making people's jobs less secure. There might also be some fear of future tax increases, the report said.

"Households may respond by increasing their precautionary saving," the report said.

"All of these effects are, however, highly uncertain. History does not provide a clear guide."

'Paradox of thrift'

In the recession of the 1990s, saving increased sharply and remained high for some time, but in the 1970s recession there was little change.

Reining in spending would have an effect on the growth of the economy as a whole and, in turn, individuals own income and their ability to save.

"Any attempt to reduce consumption is likely to push down on output and hence household incomes. That could actually make it harder for households to increase their saving - an effect know as the paradox of thrift."

Figures obtained by the BBC recently showed that UK households saw their wealth drop by an average of almost £31,000 each last year, because of the credit crunch and the recession.

The gathering economic and financial crisis undermined house prices and stock market investments.

But for the majority of people who are not intending to cash in on the value of their home, this fall in property prices would have had little impact on their lives.

Bank of England figures published earlier this month showed that in July the total amount of personal debt in the UK fell for the first time since records began in 1993 as people reduced their mortgage borrowing.

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