Does a stockpile of consumer savings offer hope for post-Covid spending?

Author: Daniël Asselbergs
April 20, 2021

We all have been mostly stuck at home for the past 12 months. We as students were used to spending 20 to 40 euros a week on alcohol during the week. Many of you also used to go on a holiday multiple times a year. You probably also noticed that your savings account started to grow. An OECD report about consumer spending in 2020 was recently published. According to the OECD this stockpile of saved cash has accumulated to $5.4tn USD, since the beginning of the worldwide lockdowns. The organization is becoming increasingly confident about the economic outlook. This pile of saved money paves the way for a strong rebound in spending as businesses open.You have probably fantasized about the amazing trips or adventure you will go on once this pandemic is over, according to the OECD you aren’t the only one. 

Households around the globe accumulated the excess, defined as the additional savings compared with the 2019 spending pattern and equating to more than 6 percent of global gross domestic product, by the end of the first quarter of this year, according to estimates by credit rating agency Moody’s. And booming global consumer confidence suggests shoppers will be willing to spend again as soon as shops, bars and restaurants reopen when restrictions to control the spread of the virus are eased. In the first quarter of this year the Conference Board global consumer confidence index hit its highest level since records began in 2005, with significant uplifts in all regions of the world. This increase in demand is often called pent-up demand.

The countries that ended up saving the most, seen as the excess savings as a percentage of the GDP, are the United States, United Kingdom and Canada. Their excess savings were 12%, 10.4% and 9.6% respectively. These countries also happen to have one of the largest economies, determined by the size of their gross domestic product. Moody’s calculated that when consumers decide to spend about a third of their excess savings they would increase worldwide output by just over 2 percentage points both this and next year.

One major indicator to global spending is the global consumer confidence index. When consumers have less confidence in the economy they are less inclined to spend their money. After all, if you think the economy is in a bad shape you probably won’t be spending all your money since there is a bigger risk of losing your job. The financial crisis saw consumer confidence plummet to 77 ponts. The lowest point seen since the pandemic is 92. We are currently back to pre-pandemic highs, this is very bullish for the global spending outlook. Household incomes have largely been shielded from harsh blows due to the unprecedented government stimulus schemes in most western economies. 

Slower vaccine rollout would cause the pent-up demand to not be released. Many European Union countries, where there aren’t that many vaccinated yet, could see less of an increase in the demand in the upcoming two quarters. A number of Middle Eastern countries where government support has been generous also have significant excess savings, while in Asia, accumulated excess savings were lower than in other regions as the pandemic has been contained and the impact on household behaviour was less pronounced. In South America and eastern Europe savings were lower as a result of the heavy hit from the pandemic and less government support.

The inequality of wealth however has become more pronounced in every country. Rich households saw the largest increase of excess savings. Jan Hatzius, economist at Goldman Sachs, estimated that nearly two-thirds of US excess savings were held by the richest 40 per cent of the population and suggested this could hold back the scale of the economic boost because “high-income households will hold (rather than spend) the bulk of excess savings”. It remains to be seen what the actual increase in GDP will be.

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