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Part of these savings was the result of households taking a
more cautious stance against an increasingly uncertain economic
backdrop (precautionary savings).
Our estimates suggest that a large majority of the excess
savings (around 85%) built-in 2020 were 'forced' owing to the
impossibility to purchase certain goods or services as a result of
coronavirus disease 2019 (COVID-19) restrictions.
This opens the door to a large increase in private consumption
once restrictions are eased, which we currently expect to happen
late in the second quarter of 2021.
However, we assess that savings will remain above their
pre-pandemic level during the rest of 2021, as many factors are
still likely to weigh down on spending.
Households' savings reached an unprecedented level in 2020. The
eurozone savings ratio increased from an average of 12.8% in 2019
to a peak of 24.6% during the second quarter of 2020. To put this
figure in context, the savings rate averaged 12.8% between 2000 and
2019, while its previous peak had been 14.2% during the third
quarter of 2009 (see Chart 1). A key factor behind the sharp
increase in savings has been the success of fiscal policy in
protecting households' incomes. Eurozone households' gross
disposable income held up substantially better than in previous
recessions despite the exceptionally large decline in activity (see
chart 2).
Will the large cushion of savings result in a
consumer-led recovery?
While consumer demand struggled across the eurozone in 2020, the
substantial increase in savings opens the door to a rapid and large
recovery once restrictions are unwound. The impact may be strong
given that a large majority of the excess savings were 'forced'
(i.e., resulting from the impossibility to purchase certain goods
or services during periods of lockdown).
Our estimates suggest that they accounted for around 85% of the
total increase in households' savings in 2020. In nominal terms,
this would equate to EUR432 billion, or 3.8% of the eurozone's GDP
in 2020. In principle, this is good news: by their nature, 'forced'
savings should be more ready to be spent once the restrictions are
lifted. On this respect, vaccination programmes will have a key
role to play.
While the initial slow progress on vaccination rollouts is
likely to delay the rebound in consumption, vaccination programmes
will still play a key role in driving the recovery in consumer
spending (see chart 3). First, by allowing a more permanent opening
of the economy once pressure on healthcare systems eases and a
sufficiently large proportion of the adult population is
vaccinated. This should lead to a substantial decline in 'forced'
savings. Second, vaccines are likely to boost confidence in the
recovery. Successful vaccine rollouts would substantially lower the
probability of measures having to be tightened markedly, at least
in the foreseeable future. This should also lead to a decline in
precautionary savings, assuming that labour market conditions do
not deteriorate markedly.
The labour market and households' expectations of its future
dynamics are among the most important determinants of household
spending. The fallout from the COVID-19 virus shock presents an
unusual situation as the unemployment rate increased by much less
than would be historically consistent with an economic shock of
this magnitude. This has been partly the result of large declines
in labour participation rates as potential job seekers did not
actively look for a job during periods when a large share of the
economy is closed because of lockdowns. Moreover, governments put
in place measures to mitigate the impact of the pandemic on the
labour market, with the most important ones being the furlough
schemes introduced in several countries.
On a positive note, the latest survey evidence suggests that
despite the deterioration of economic conditions at the start of
2021, firms' hiring intentions are resilient (see Chart 4).
However, there are several reasons to be cautious. While the
extensive government support measures have sustained employment
levels, most of them are only temporary and set to be gradually
withdrawn once restrictions are eased. This is likely to lead to an
increase in the labour force as job seekers re-enter the labour
market, which, in turn, will put upward pressure on the
unemployment rate. The asymmetric impact of the pandemic on labour
markets, which particularly affected lower-income households (who
have a higher propensity to consume), is also likely to keep
savings relatively elevated.
Studies also suggest that recoveries from recessions where the
fall in spending was concentrated in services, such as the current
(see chart 5), tend to be softer compared with recessions with a
larger decline in consumption of goods. While consumption in
services is likely to grow sharply once restrictions are eased, the
rebound is unlikely to make up for the losses fully.
Bottom line: Savings rates likely to decline
substantially during the second half of 2021 but remain above their
pre-pandemic level for a prolonged period of time
We expect a consumer-led growth spurt to materialise in 2021,
although the quarterly peak is likely to be smaller than during the
third quarter of 2020 when consumption rose by 14.0% quarter on
quarter (q/q). Our current baseline projections assume that this
recovery is likely to start late in the second quarter of 2021 as
COVID-19 restrictions are gradually eased.
However, savings are still likely to remain above their
pre-pandemic level in 2021 and 2022. Although the reopening of the
economy should lead to a large reduction of 'forced' savings,
precautionary savings are likely to stand elevated, compared with
their historical level, at least in 2021 and 2022.
Posted 28 April 2021 by Diego Iscaro, Senior Economist, Europe Economics and
Ken Wattret, Vice President, Economics, IHS Markit