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What Tipping Points might there be in the UK savings market? Part III: Climate Change and Current Events

Tuesday 17 December 2019 Data Insight & Analytics


Paul Kenny's picture
By Paul Kenny

Could climate change change UK savings?

Yorkshire has been drowning. New South Wales is burning. California has been burning, again, and the resulting power outages are threatening the credit rating of America’s most populous state. 2017 was the most expensive year on record for weather-related insurance claims – for 12 months, and then 2018 set a new record. Polar bears aren’t the only ones at risk. P&Ls are too.

I’m interested by a development at Barclays. They identified that mortgage borrowers keen to own a well-insulated home were less likely to default. So they created a green mortgage, 5bps lower than comparable product, and offered it to purchasers of new-build homes with A and B energy ratings. If savings providers don’t respond in kind, might funds flow from them to banks and mutuals demonstrating a stronger ESG profile?

‘Events, dear boy, events’

In Westminster, we’ve had single-issue government for more than three years now. The decisive outcome of the general election brings an end to Brexit uncertainty, but the negotiation of new trade deals and the renewed momentum behind Scottish independence will remain very considerable distractions for the government. In my second blog on savings tipping points, I wrote about the unintended consequences on the retail finance sector of well-meaning policies. I’d be very surprised if we weren’t rocked by further unintended consequences over the next couple of years.

The real test of the limited agreement just reached between the US and China to halt their trade war will lie in its implementation, while I find it interesting that September’s drone strike on a Saudi oil field went without retaliation. Were the Middle East to take a turn for the worse, might events turn quite extreme, quite quickly? I’m old enough to remember the 1973 oil crisis, and its effect on the UK economy.

Any or all of these things could generate an increase in ‘rainy day’ savings, or a recession that might cause long-term damage to the savings sector.

Whatever, don’t expect even a global stock market correction to generate more deposits. The chart below, updated to take account of Friday's reaction to the election, shows what’s happened in equity markets over the last year or so. Q4 2018 was very poor, in part because Fed Chairman Jerome Powell set unclear expectations about how high interest rates might increase – how long ago that seems now. H1 2019 saw stock markets rise more than 10% on both sides of the Atlantic. Conversely, equity markets have seen heavy H2 2019 fluctuations, often daily, in reaction to Brexit developments and US-China trade talks. 

My feeling is that most retail investors have already cashed in if they were going to, leaving those who believe in the old adage that time in the market matters more than timing it to ride the fluctuations out. Even if this group were to hold more cash, I think it would simply sit in stocks & shares ISAs and SIPPs, and wouldn’t flow to deposit accounts.  

So will the UK savings sector see a tipping point soon?

A market rarely encounters a single tipping point, and the UK savings sector has become unusually complex. The extent to which tech will be an agent of rapid change will be influenced by how well it overcomes consumer mistrust and inertia, and how quickly it is adopted by different types of provider, many of whom are hindered by legacy systems. Other factors will be in the mix, including the volume and scale of providers; the margins they can earn from the deposits they generate; the pace at which the unintended consequences of ring-fencing, FLS and TFS unwind; and a great many of what former Prime Minister Harold Macmillan may or may not have referred to as ‘events, dear boy, events’.

CACI’s Retail Finance Benchmarking team will be monitoring the savings market with our usual mix of diligence and curiosity, and helping our members make sense of it all.


How are climate change and current events in politics affecting the UK Savings Market?

What Tipping Points might there be in the UK savings market? Part III: Climate Change and Current Events