Consumption sleeps, but fear saving fuels

High interest rates have melted away the excess savings accumulated since the pandemic that families used for private consumption. The high financing costs have changed the dynamics of families’ treasury and their spending, in favor of inflation and the European Central Bank (ECB). The organization itself has warned that it will no longer be that money that supports the eurozone economy, since A large part is invested in illiquid assets or is saved in the expectation of worse times to come, saving fear.

From the end of 2019 to the middle of this year, excess savings have been generated a billion thanks to the pandemic, which represents 12% of the annual disposable income of the euro zone, according to a publication from this week’s ECB, ‘Excess savings: to spend or not to spend’. That is the key question now for the organization, if this figure is going to be reserved or if it will be used for common expenses. Depending on what happens, demand will be curbed and inflation controlled or the price stability objective will move away.

To anticipate, the body analyzes two things at the same time, the amount of excess savings and the use to which it is put. “We need to understand where people’s savings come from before we talk about where they will go,” he summarizes.

Therefore, they have studied these money flows since the pandemic broke out. At that time, families They managed to save a lot because they did not spendthat is, thanks to that could not be consumed. Basically, travel and leisure were very limited and were even practically non-existent during the quarantine. In addition, household reserves increased thanks to tax benefits (ERTEs, tax income or paid family leave). Both items supported “forced savings”, which could not be used, until the end of 2021 and beginning of 2022.

In fact, it was expected that this dynamic would drive a ‘V’ post-coronavirus recovery. Something that time ruled out, since the savings were not used in rampant mode with the end of the restrictions, but rather continued to be saved and used little by little.

In any case, it was from the second quarter of 2022 when this containment in consumption began to disappear. It no longer served to help households save, but quite the opposite: private consumption was once again weighing on the pockets. The composition of the piggy banks of families in the euro zone was changing and, currently, excess savings come from salaries, other income and tax benefits.

Thus, this surplus has been varying in recent years, with its ups and downs, but, once the limitations of the coronavirus and the “forced” factor have completely disappeared, further savings have stagnated. And the question is not only that it will not increase, but that What is left in the piggy banks after these years will not be spent and will be saved, according to the ECB analysis. Therefore, consumption is not going to move the economy.

Although households are not going to use that money on goods and services other than basic ones, this does not mean that they are not going to do anything with those funds. While in the harshest years of the pandemic this excess was kept in cash or bank deposits, That trend has been changing. Starting in 2021, these extras began to move towards other less liquid financial assets and non-financial assets, such as housing, in addition to being used to pay loans.

That transition, leaving cash and deposits behind, has been consolidated until now. Since the course began, every time more money is used for the three aforementioned games that began to be rotated two years ago. “This shift in the distribution of excess cash has accelerated recently, probably reflecting increases in interest rates,” the report summarizes.

Inflation and monetary restriction cause money to lose value. It takes more to buy the same thing, so purchasing power goes down. Furthermore, the price of money itself rises with increases in interest rates. In this context, the appropriate thing is not to wait for this loss of value to occur and look for returns in the market, which is what has happened.

Thus, excess savings are being deposited in illiquid investments, according to the ECB. It is the 20% of the richest population in the euro zone that has half (49.3%) of that surplus and can afford to invest in the long term. “Not all groups can afford it,” the report warns. Meanwhile, the next wealthiest sector has 19.8% of the reserves, but the 20% with the lowest resources barely have 8.9% of the excess savings. And this matters because they are the greatest fortunes those who spend less on each additional euro that they do not dedicate to basic consumption, to your usual expenses.

With this, we would have a complete picture of what is happening and will happen in the eurozone. Those who have the bulk of the savings, half, have it in illiquid assets and, furthermore, they are not the ones who traditionally drive discretionary spending the most. On the other hand, the lowest incomes barely have reserves available.

“This suggests that the majority of this savings has come to stay and not to be spent, that is, as reserves for worse times. In other words, those who hope that the money that was saved during the pandemic will support consumption in the short “They will be disappointed in the long term. This is very important to understand what is going to drive inflation and how monetary policy should respond,” the blog concludes.

The ECB itself anticipates that there will be a slowdown in consumption and demand, an essential factor to control inflation. Interest rates have done their job and wiped out everyday savings, while the extra money left has been moved out of cash and deposits. Thus, the ECB has managed, with the restrictive cycle, to influence families’ savings and rotate their portfolios. Forced savings have become fear savings.