Households intensify their search for high-interest savings accounts when the economy turns sour, inadvertently making recessions more severe, according to new research from the University of Surrey.
When times are good, many savers pay little attention to the interest rates on their bank accounts. But when the economy falters, this study finds that people become much more vigilant, scouring the market for better savings deals. This behavioural shift – essentially shopping around more when money is tight – might sound sensible for individual households. However, the research shows it has an unintended macroeconomic consequence: by securing higher interest rates on their savings during downturns, households collectively contribute to deeper slumps in overall spending.
The study, published in the American Economic Journal: Macroeconomics, analysed detailed UK banking data and built an economic model to understand this phenomenon. This revealed that during recessions (when, for example, unemployment is rising, and average interest rates are low) households on average make better savings choices than they would in boom times, more reliably choosing the products with the highest interest rates. The study’s simulations found that this extra attention to savings significantly amplifies economic fluctuations – making swings in consumer spending about 14% more pronounced than if people’s attentiveness stayed constant. In practical terms, the collective drive to “make every pound count” by finding better interest rates ends up pulling even more money out of the economy when it’s already struggling.
Dr Alistair Macaulay, author of the study and Surrey Future Fellow in Economics at the University of Surrey, said:
“For many families, tightening the purse strings and seeking better savings rates is a natural response to difficult times. But when millions do the same, it can unintentionally make the downturn worse. My findings show that small, individual decisions – like shopping around for the best savings account – can collectively magnify economic swings. If consumers could more easily access clear, comparable information about savings options, this effect could be reduced. My modelling suggests that halving the ‘cost’ of information could cut fluctuations in consumer spending by around 11%, helping to make the economy more resilient when faced with future shocks.”
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