Article

Will consumers spend more of their savings?

A collapse in consumer confidence is exactly what central banks want. As people worry about the ‘cost-of-living’ crisis they are likely become more cautious – and this frugality will help ease prices pressures.

| 5 min read

Many people with secure jobs and reasonable salaries worked from home during the Covid-19 lockdowns and received all their pay. They were much more fortunate than those who lost their jobs because they relied on going to a place of work to interact with customers – or who kept their jobs on reduced incomes with some help from state systems of support.

The home workers saved a lot of money during the peak of the lockdowns in spring 2020 and again in 2021. They saved all their travel costs to the office, saved money on lunches and coffees out, cancelled holidays and made little use of their cars. As a result, the savings rate on both sides of the Atlantic shot up. The US savings rate, typically around 7% before the pandemic, ballooned to 33.8% in April 2020 and hit a lesser peak of 26.6% in March 2021. Euro-area savings hit 25% in the spring of 2021 and the peak was above 20% in 2021. In more normal times, the European savings rate is about 13%.

In recent weeks – as the cost of petrol, home heating and food has soared – these figures have come down. The US rate plunged to 5.4%, whilst the first-quarter European rate was still quite high at 15%. The savings rate, of course, is an average of all income levels and different amounts of debt and savings. If the consumer borrows to spend, that is ‘negative savings’. This means it is theoretically possible for the people with savings to keep them – but for those without to borrow more, leading to a drop in the savings rate without actual savings being drawn down. In practice, there are various changes going on all the time as different groups of people on varied incomes adjust their appetite to spend and borrow.

Consumers are clearly worried

Consumer confidence indices have also plunged, often to new lows. The US University of Michigan survey showed consumer confidence at 50, compared to a more normal figure in the range of 80-100. Euro-area consumer confidence was logged at -23.6, around the levels that emerged during the banking crash of 2008. Many people on lower incomes are reining in discretionary spending as they grapple with the heating and food bills. People with more money saved also seem to be affected by the rapid inflation and the darker economic mood – and are also likely to put off some purchases of larger items as well. They are more likely to sustain spending on travel and leisure as they seek to make up for the losses during lockdowns.

Most people rely on their incomes from their jobs or pensions for their spending. They see the value of what they earn or receive is being eroded rapidly by inflation which leads many to reconsider what they can afford. With the mortgage rate rising for anyone not on a fixed mortgage, rents going up and a surge in utility bills, there is every reason for more caution. The rich, with substantial savings, do not live under the same constraints – but they may well have investments in bonds and equities that have fallen in value. This, too, can have a depressing impact on an individual’s willingness to spend.

The collapse of consumer confidence is exactly what the central banks want.

They hope that their tough-talking, which has been increasingly backed by tougher action, will cut demand by putting more people off buying too much. Supply and demand need to be brought into a better balance, reducing the opportunity for suppliers and intermediaries to raise prices. If demand tails off for a variety of ‘nice-to-have’ products and services, demand for replacement stock will drop. Some companies will want to reduce their stocks from the newly-restored levels too, so some price weakness is likely.

Of course, it is entirely possible for the impact on demand to be negligible. People may spend their savings more aggressively to make up for their squeezed disposable income. Some could increase their debt to achieve the same thing, though the price and availability of credit are likely to tighten as rates rise and banks worry about people’s capacity to service and repay a debt. In the current mood. it seems more likely people will want to keep precautionary savings at higher levels than before and will be more careful about committing to major new purchases based on borrowings. This will help speed the adjustment to lower inflation. A big drawdown of savings would extend the inflationary pressures and require higher rates for longer. Frugality is more likely.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Will consumers spend more of their savings?

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