Savings and consumption in the post-pandemic economy

July 23, 2021Blog

I first wrote about the changes in consumption and saving behavior in Ireland at the start of the pandemic last year. I asked what consumers might do with their accumulated savings and what the macroeconomic implications of that might be. A few weeks ago I broached this subject from the Irish point of view. Today I want to look at it from an international perspective and take stock of new evidence that has emerged over the past year.

In 2020, savings and savings rates (i.e. the share of income saved) rose sharply in many countries as consumption fell amid pandemic restrictions and governments have provided unprecedented levels of income support. In the euro area, the rise in savings reflected the fall in spending, as disposable income remained broadly unchanged; in Ireland disposable income increased as consumption declined. A number of factors have contributed to this, including precautionary savings (due to uncertainty about the future) and forced savings (due to lack of capacity to spend). Consumption increased in all countries during the second half of 2020, with economies partially reopening (see Figure 1). Towards the end of 2020, savings rates rose again in some countries due to changes in public health. In 2021, economies are reopened in several countries, albeit gradually. Evidence for Ireland suggests that consumption has increased since mid-April 2021 with the reopening of the economy.

Chart 1. Savings rate

Looking at the euro area as a whole, sectoral account data can provide insight into how households have used these savings. These accounts describe how savings and financial commitments such as loans can be used to make investments (which can be financial, for example deposits or pension funds, or can be non-financial, for example home purchases. ). In 2020, the sharp increase in savings in the household sector corresponds to an increase in financial investment (see Chart 2). The flows of non-financial investments were little changed. Most of the increase in financial investment has taken the form of deposits, although there has also been an increase in flows to equities and investment fund shares (see Figure 3). In other countries, such as the UK and the US, pandemic-induced savings have also led to a surge in bank deposits.

Figure 2. Household financing and investment flows in the euro area

Chart 3. The distribution of financial investments by household sector in the euro zone

In the first quarter of 2021, financial investments by households in the euro area grew at an annual rate of 4.8% (compared to 4.1% in the previous quarter), mainly thanks to stocks and other equity. The annual growth rate of non-financial investments (mainly housing) was 6.5% (0.2% in the last quarter of 2020).

What are the prospects for savings behavior after the pandemic?

As immunization programs accelerate and consumer confidence increases, savings rates are likely to decline, which will drive consumption growth over the next several years. One question that remains unanswered is how quickly savings rates will return to pre-pandemic levels. For Ireland, the baseline scenario of the latest Quarterly Bulletin forecasts assumes that the savings rate will decline over the projection horizon and fall below the pre-pandemic level in 2023. For the euro area, the rate savings are expected to return to pre-pandemic levels. pandemic level during 2022. Overall, it is likely that the expenditure share of future income will return to the previous trend in the coming years.

What will happen to the savings stock?

We also need to consider what will happen to the savings stock that many people have accumulated during the pandemic. The baseline scenario of the last Quarterly Bulletin assumes a small degree of reduction in the savings stock in Ireland, based on a savings rate below its 2019 level in 2023. Similarly, for the euro area, only a modest decline in the accumulated stock of savings is assumed in the baseline macroeconomic projections.

To give an idea of ​​the size of accumulated savings, one measure is the stock of excess bank deposits (i.e. above the level that would likely have prevailed without the pandemic). In the euro area, this is estimated at 379 billion euros in May 2021, which is equivalent to almost 6% of nominal private consumption in 2019. To examine how this sum could fuel consumption, we can turn to l abundant economic literature on the marginal economy. propensity to consume (MPC). As I pointed out a few weeks ago, the MBM is the share of new disposable income or wealth consumed by households. For example, if an individual receives an increase of € 100 in his disposable income and spends € 15, his marginal propensity to consume is 0.15.

There is ample evidence that the MPC of consumers excluding wealth is much lower than it is excluding income. Considering an extra dollar of financial wealth, consumers would typically spend between 1 and 7 cents compared to 20 to 45 cents on income. Whether households spend their accumulated savings therefore depends on how they perceive this savings: is it income or wealth? The fact that a large part of the savings stock is held in the form of relatively liquid bank deposits argues in favor of a view of saving closer to income. However, as savings are held over longer and longer periods of time and the need for liquidity decreases, households may increasingly view their savings as wealth. It is likely that the MPC for excess savings during the pandemic will fall somewhere between the values ​​of financial wealth and income.

The distribution of accumulated savings is also important for the development of any count of this savings. Savings during the pandemic tended to be accumulated by older, richer households. These households were more likely to maintain their income throughout the pandemic. Their consumption was also more constrained by the shutdown of non-essential services on which they spend a larger share of their income. Overall, this could potentially create the conditions for increased consumption from pent-up demand. However, there is plenty of evidence showing that the wealthiest and the elderly spend less of any additional income or wealth (see recent research from the Central Bank of Ireland and the ECB, as well as two articles from 2017 and 2015) . If these effects continued, there would be a moderating effect on any increase in consumption.

In thinking about the outlook for consumption, we need to consider the types of goods or services for which there might be pent-up demand. Recent research shows that the prospects for recovery from a demand-led recession depend on whether spending cuts during a recession have been concentrated in services or durable goods. The recovery is likely to be weaker if the cuts were mainly in services, that is, the kind of items wealthier people were not allowed to buy during the pandemic, as the potential demand repressed is lower: there is a limit to the number of meals at the restaurant, for example, you can catch up.

In contrast, research shows that pent-up demand for durable goods is leading to a recovery that exceeds the previous trend. The purchase of a new durable good, such as a washing machine, can take place after the restrictions are relaxed (consumption is therefore deferred rather than lost). Recent data from the United States and the euro area confirm this: real personal consumption spending in the United States remained below pre-pandemic levels for services in May 2021, while it recovered. for goods, in particular for durable goods (see Chart 4). Likewise, in the euro area in the third and fourth quarters of 2020, when restrictions were relaxed, demand for durable goods was above the pre-pandemic trend, while consumption of services remained well below the level. before the pandemic.

Chart 4. Consumer spending in the United States and the euro area

Panel A: United States

Panel B: Euro zone

Dynamics of consumption and inflation

A return of the savings rate to more normal levels, over the next two years, will stimulate consumption and support the recovery. This would be further reinforced by a certain unwinding of the accumulated savings stock. Growth in consumption can also put upward pressure on the prices of consumer goods and services, especially if there are supply-demand mismatches in certain sectors, due to the pandemic. However, these supply constraints would likely be resolved in the medium term, meaning that the associated inflationary pressures would be temporary. In any case, the Governing Council of the ECB has the necessary tools to deal with the sustained upward pressure on prices.

Gabriel Makhlouf

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