Debunking The Myth Of The Savings Glut

Many economists point out to the “abnormal” rise in savings as a bullish signal that will drive a stronger recovery and a consumption boom.

The figures look impressive. In the United States, JP Morgan estimates $2 trillion in deposits, up from $1 trillion before the pandemic. In the Eurozone, Bloomberg Economics estimates an excess of currency and deposit holdings of 300 billion euro, also double the level seen prior to the Covid-19 crisis. However, the devil is in the details.

The allegedly massive savings glut in the Eurozone is, in reality, around 4% of an average household’s annual income, hardly a glut. Even less so when we consider the composition. Most of the increase in savings comes from the wealthiest segments of the economy, according to Eurostat. Furthermore, the household saving rate in the euro area was at 17.3% in the third quarter of 2020, compared with 24.6% in the second quarter of 2020, and the Eurozone economy still showed a poor and jobless recovery. A very important factor also is the comparison with real disposable income. In the same period, according to Eurostat, households burnt savings as consumption rose much faster, at 13%, than the recovery in disposable income, a mere 3.9%. By October, that “bump” effect was gone and the Eurozone resumed its weak recovery with households in a tighter position.

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The savings rate is irrelevant if we do not take into account the instability in the job market and the real disposable income of families in the period. A 100% increase in savings’ rate when real wages have fallen and millions of citizens remain in furloughed jobs or unemployed nine months into the re-opening is not strange, but completely logical. Furthermore, to assume that these savings will turn into an orgy of consumption in 2021 ignores the reality of the job market and the history of recoveries. Euro area unemployment remains at 8.3% with all job segments of PMIs in contraction in January. More than 6 million workers in Europe’s leading econmies remain in furloughed jobs, and hiring plans are not rising as much as would be required. Citizens do not go out and spend like there is no tomorrow when the job market recovery is so fragile. We also have to note that the economy may have seen some travel restrictions and lockdowns, but online shopping is available everywhere, and retail sales have shown only modest improvements after the slump

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