Macro Analysis /
United States of America

Chart of the Week - Huge excess savings, but for different reasons

    Daniel Vernazza
    Daniel Vernazza

    Chief International Economist

    UniCredit
    16 April 2021
    Published by
    • Our Chart of the Week shows the huge excess savings balances that households in the US and Europe have accumulated during the pandemic. Excess savings last year (measured as the cumulative sum of savings over and above the 2018-19 average) range from 8% of GDP in the US and 7% in the UK, to 4% in the eurozone and 3% in Germany. A “normal” level of savings (using the 2018-19 average) is equivalent to around 8-9% of GDP in the US and eurozone aggregate. Interestingly, however, the rise in savings balances has been for very different reasons across countries.
    • In the US, 90% of the rise in savings is due to the strong rise in household disposable income, reflecting the unprecedented government transfers, which have been skewed towards households via stimulus checks and enhanced unemployment benefits. At the other extreme, in Italy and Spain, the rise in savings is due entirely to the sharp fall in spending, particularly on services that involve a high degree of social interaction. The latter was in part forced via mandated restrictions and in part due to precautionary behavior due to concerns over health and income/jobs.
    • A key question for the economic outlook is whether and how quickly households will run down their excess savings balances. The answer will depend both on the ability to spend (which will depend on restrictions) and the willingness to spend (which will depend on consumer confidence and pent-up demand). To the extent that cuts to expenditure reflect mandated restrictions one would expect excess savings balances to fall as restrictions ease and pent-up demand is unleashed. But the degree and speed of any reduction in excess savings balances will also depend significantly on whether precautionary behavior persists (which will depend on health concerns and the outlook for jobs and income). In the US, where the rise in savings is due mostly to the rise in household disposable income from (one-off) government transfers, we could see a gradual run-down of excess savings over several years, consistent with low estimates of the so-called wealth effect (i.e. the willingness of households to spend out of increases in their wealth).1
    • There are other, common, forces that will determine the willingness to spend, including the unequal distribution of savings (the rise in savings is concentrated among higher-income groups, which tend to have a lower propensity to consume) and the evidence that pent-up demand (and, hence, the recovery) tends to be weaker following a recession concentrated in services rather than durable goods (some of the spending cuts to services during the pandemic have been lost permanently, not delayed; for example, if you cannot go to a restaurant or a barber shop today, you will hardly go twice tomorrow if restrictions are lifted).2
    • In the US, since the end of last year there has been additional, substantial fiscal stimulus that has led to a further sharp rise in excess savings. Latest, following the more than USD 300bn sent to American households by the US Treasury in the second half of March, retail sales rose a stellar 9.8% mom in March (or USD 55bn – less than 20% of the stimulus checks). Retail sales are only a subset of total personal consumption, but it seems highly likely that a sizeable proportion of the stimulus checks were not spent, at least not immediately.