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Central bankers have spent the past few years struggling with unknowns. Would the price of stuff fall as it became less of a nightmare to source it? Could companies slow their hiring without going on a firing binge? And would the hoards of cash amassed during the pandemic be spent? Now, as the Federal Reserve, Bank of England and ECB seem likely to pause their interest-rate rises, that third source of uncertainty is fading. Broadly speaking, while in America households chose to spend down their piles of extra money, in Britain and the eurozone they held back.
It is not unusual for people to add to rainy-day funds during recessions. But the surge in savings during the pandemic was extraordinary. At the peak during the first quarter of 2020, households in the eurozone, Britain and America were hoarding a quarter of their disposable income. This went far beyond normal precautions, or even the desire to shift spending from today to tomorrow. They were saving because lockdowns stopped them from doing much else.
As life returned to normal, central bankers watched warily. Post-pandemic conditions were complicated enough; a rush of spending would buoy prices and make fighting inflation harder. Historical experience suggested they should watch out. During the second world war, American rationing contributed to an enormous rise in savings. A working paper by Gillian Brunet of Smith College and Sandile Hlatshwayo of the Council of Economic Advisers found that places that saw the biggest increases went on to see a higher share of people splurging on modern bathrooms, electric fridges and motor cars.
After adjusting for inflation, 2022 saw real incomes in America fall. But at the same time real spending increased. The savings rate plunged to below its pre-pandemic level. People were trying to maintain their living standards — fair enough. But the Fed did not thank them.
Betting against the American consumer is bold. Yet there are signs that the source of their spree may be drying up. Economists at the Federal Reserve Board have predicted that as of the third quarter of this year (ie now) America’s excess household savings will have been spent. Analysis by Chris Wheat of JPMorgan Chase suggests that before the pandemic people tended to hold the cash equivalent of two to three weeks’ worth of spending in their bank accounts, with poorer households holding a bit less and richer ones holding a bit more. At the peak, that rose to about four weeks. But now, behaviour has mostly returned to how it was before.
The experience in the eurozone has been quite different. With the notable exception of Italy, households have tended to hold back. The eurozone savings rate has not crashed, but returned to roughly pre-pandemic levels. (In Britain higher pension contributions mean it is still elevated.)
Why has the response either side of the Atlantic been quite so different? On September 21, members of Britain’s Monetary Policy Committee suggested that higher consumer confidence in America could have contributed. Eyeballing OECD indicators, Britons do seem to have been gloomier than Americans since the start of 2022. But despite a war on their doorstep, users of the euro do not.
The difference could be down to the nature of the government support during the pandemic. European support focused more on keeping people in their jobs. The US stimulus cheques were relatively untargeted and progressive, so more likely to be spent. But while striking, the role of those cash handouts shouldn’t be overstated. Given survey evidence that about a third of people saved them, they can only account for around a tenth of the excess.
As time passes it looks decreasingly likely that Britain and the euro area will mimic American behaviour. A bulletin by economists at the ECB finds that whereas US households kept their excess savings built up in cash deposits, those in the eurozone did not. Instead, savings in less liquid forms increased above their pre-pandemic trend. That has major implications for the chances of the cash being spent. Whereas people tend to consume about half of a boost to their liquid assets, the share is closer to 5 per cent from the illiquid sort.
Economists at Goldman Sachs have reasoned that accumulated savings are only a very few per cent of household financial net worth, and are increasingly being managed like other assets. It also seems unlikely that there is much pent-up demand yet to be unleashed. If the grandparents wanted to go on a cruise, they probably would have gone by now. Perhaps the stash might be used to cushion spending in case a recession strikes. But the risk of a surge is ebbing.