Weekly Update - How long will Europeans continue to stuff their savings buffer?
The savings pile has been one of the unusual factors in the post-Covid economic cycle. One year on, it has fallen in the United States but continues to increase in Europe. These surplus savings could potentially buoy household spending, provided savers are confident their finances are lastingly back to normal.
Substantial post-Covid savings pile. Covid and its associated crisis led to households in developed economies piling up massive savings. Significant government transfers meant they could sustain all or some of their incomes, which they could not then spend because of pandemic restrictions. Surplus savings reached pretty substantial levels, nearly 10% of GDP in the United States – where public support was especially generous – and over 7% in Europe. And it is these buffers that form one of the peculiarities of the post-Covid recovery, allowing households to mitigate the shocks of rising inflation and interest rates. However, Europeans do not so far seem to have dipped into their savings.
US households are drawing on their savings to consume, unlike frugal Europeans. For just over a year now, households in the United States have reversed the trend and started dipping into their surplus savings to prop up their inflation-eroded buying power, funding a buoyant consumer spending trend. US savings rates – i.e. the share of income saved each month – has also declined significantly. From around 11% before Covid it shot up to over 22% in 2021 but has now dropped back below 8%. In sharp contrast Europe’s households have continued to save more of their income as their savings rates actually remain higher than pre-Covid. Two explanations suggest themselves for this divergent behaviour. The first is that Europe's closeness to the Ukraine war has hit household confidence harder. The second is that Europeans have felt in a sharper way the inflation increase as salary rises have been largely repressed whereas wages in the United States have broadly kept pace with inflation.
A potential source of support for demand, provided confidence can be restored. European households today are sitting on comfortable savings buffers. Several factors should help restore their confidence in the economy and stop them over-saving, perhaps even encourage them to start spending some of their saved cash. For one thing, labour markets are looking stronger which should keep wages rising. For another, inflation is now on the way down, paving the way for a more favourable trend. Overall, we could see a serious revival in household consumption, provided confidence revives.
Finally, in the main events of the week, we have chosen to talk about OPEC+ and to focus on PMIs in US.