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“Excess” savings and the outlook for consumption

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“Excess” savings and the outlook for consumption

The Covid pandemic has been associated with a rise in savings rates across the world to exceptional levels. What are the prospects for consumer spending?

Stefan Gerlach
Stefan Gerlach

Consumption’s Covid collapse

The start of the Covid pandemic in early 2020 had an enormous impact on household behaviour, with consumption spending collapsed. In the US, various government support programs boosted personal disposable income, leading to a surge in the personal saving rate to over 30% in April last year. The increase in saving was also seen in other economies including the UK and eurozone.

At least four factors appear to have played a role in causing the large decline in consumption.

  1. With lockdowns leading to the closures of stores, restaurants, and bars, often for prolonged periods of time, households were simply unable to purchase goods and services.
  2. Because of the lockdown and working from home, the need for certain goods and services declined, such as the need for transportation to work or business attire. While the demand for other goods, including prepared meals for home consumption and equipment for home offices rose, the net effect was to reduce spending.
  3. The risk of catching the virus led households to refrain from non-essential trips to stores and restaurants, cafés etc.
  4. Concerns about becoming unemployed or being unable to work for a longer period for health reasons caused a rise in desired saving.


Exploring wealth effects

The increase in saving during the pandemic is often referred to as “excess” or “forced,” but that is too simple an explanation. Rather than focusing on whether the increase in savings occurred because households were unable to spend or did not want to do so, it is better to think of these savings in terms of their wealth effects.

Households who win on the lottery tend to spend their winnings by increasing current but also future consumption, and by paying down debt, including mortgages, credit card debt and car loans. It seems likely that households will react similarly in the current situation.

Households purchase durable goods, such as washing machines or cars, because of the services they provide, often for many years. An increase in wealth raises the demand for these services and will therefore lead to a temporary surge of purchases of durable goods.

By contrast, purchases of non-durable goods, such as food, are unlikely to rise sharply. Some services, such as restaurant meals, are likely to show a temporary but perhaps protracted increase as households compensate for not having been able to see friends and family during the pandemic. Other services, such as hair cuts or insurance, will not.

The wealth effect also suggests that households will want to increase future spending. That is one reason why they are unlikely to spend all their current savings. Furthermore, the fact that they are likely to want to reduce their indebtedness also implies that consumption is not likely to rise one-for-one with households’ savings.

Overall, while it seems unlikely that all the savings will be spent quickly, as vaccination campaigns across the world lead economies to open, consumers will respond by spending some of their accumulated savings and reducing their saving rate to normal levels. Given that consumption spending is such a large part of GDP, that will surely give a boost to the global economic recovery.

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