(BFM Bourse) – While savers had accumulated significant nest egg during the pandemic, the benefits expected from the release of this windfall are now in the rearview mirror or close to being so. This risks weakening the “soft landing” of advanced economies that the market so hopes for.
It is a war chest that has meanwhile fueled investors’ hopes for the economic situation: excess savings due to the pandemic.
During the health crisis, households benefited from public support allowing them to partially or completely limit their loss of income while health restrictions and economic uncertainty led them to reduce their spending. Result: their savings rates have soared.
In the euro zone, 1,000 billion euros of savings had been accumulated during the pandemic, according to Oxford Economics data from May, or 8% of gross domestic product. Another telling figure: the area’s savings rate rose from 12.6% over the period 2015-2019, to a peak of 25.4% in the second quarter of 2021, according to figures from asset manager DWS . In the United States, economists at the San Francisco Federal Reserve estimated that “excess” savings linked to the pandemic represented up to $2.1 trillion (as of August 2021).
Questions about consumption
This excess savings has led observers to hope that this windfall will serve as a consumption reserve and thus make it possible to avoid any recession. Which, it is true, more or less happened.
“The resilience of consumption over the past year can be explained in part by the fact that households have been willing to save a smaller share of their income than before the pandemic, supporting the idea that “Consumers have drawn on a stock of ‘excess’ savings accumulated in 2020 and 2021,” observed Capital Economics in July.
This does not prevent the strength of household spending, which has weakened with the rise in inflation, from currently representing a major question for the market.
For example, luxury goods benefited from a significant acceleration in demand post-pandemic, but the sector has now entered a phase of normalization. The latest publications from LVMH bear witness to this, with a stall in growth which began in the United States, where the turnover of the number one luxury company fell in the second quarter, before spreading to Europe, where Like-for-like growth was more than halved in the third quarter compared to the previous quarter (7% versus 19%).
In the United States, in an admittedly very different sector, the Target distribution group saw its like-for-like sales fall by more than 5% in the second quarter.
This is because all or part of the savings accumulated during Covid have been exhausted. The figures differ somewhat in the United States but the main message remains there.
A study published by the Federal Reserve (Fed) of San Francisco estimates that at the end of last June, American households had already drawn down around 1,800 billion of the approximately 2,100 billion dollars saved in “excess” during the pandemic and the institution estimated that the remainder would be exhausted by the end of September. For its part, the Fed (in short) published a paper in June showing that, according to it, the excess savings accumulated in the United States had already been used up in the first quarter, and would be used up by the end of the year 2023 in other advanced economies (France, Italy, Spain, United Kingdom, Canada, Australia, Germany).
The difference in evaluation between the two Feds in the United States is explained, underlines Capital Economics, by a divergence on the definition of “excessive savings”, with savings trends in normal times lower in the estimate of the San Francisco Fed.
A windfall exhausted or almost
But regardless of these differences, “the boost from ‘excess’ savings is now exhausted”, asserts Capital Economics. “Recent evidence also suggests that many households have exhausted their savings” in the United States, observes the think tank.
In a recent article, the Financial Times highlighted that American households are reducing their credit card spending, while interest rates can currently reach more than 22% on spending via these cards. Quoted by Fortune, Jane Fraser, the boss of Citigroup, recently saw “cracks” in the health of American households. “I think that some of the savings surpluses from the Covid years are about to be exhausted,” she observed.
The situation is not so different in Europe. “The extraordinary savings from the Covid period are now exhausted, except among the rich, who are not quick to spend. The economy is therefore not benefiting from a boost in savings this year,” summarized in September DWS, judging that the Covid windfall is now in the rearview mirror.
As early as May, Oxford Economics made this observation. The excess savings remaining linked to Covid are now “concentrated among households with the highest incomes and largely in illiquid assets (and therefore not quickly mobilized, Editor’s note) to compensate for inflation”, noted the firm economic analysis.
The conclusion is that investors cannot count on “covid savings” to cushion a potential market shock. “The reduction in (this) excess savings could destroy the market’s hopes of a soft landing (of the economy, editor’s note), ” Reuters judged in an analysis in July.
Julien Marion – ©2023 BFM Bourse