Euro Area’s $714 Billion Boom Hope Hinges on Senior Savers

(Bloomberg) --

For the euro area to achieve a jumpstart in economic growth with a consumption boom, a whole generation of citizens who hoard money rather than spend it would need to seize the day and splash out.

That’s because a mass of savings built up by wealthier households stuck at home without restaurant visits or vacations during the coronavirus crisis is concentrated among older Europeans, who are less likely to open their wallets than younger counterparts.

Whether that cohort of consumers will break with the norm and use their freedom to go out and spend when the pandemic abates is crucial in judging the recovery of most advanced economies. It’s most important in Europe however, which has the highest median age of any region of the world.

The wall of money that could be unleashed is vast, with Barclays Plc estimating accumulated excess savings at 600 billion euros ($714 billion). But that bank is among those concerned that the clustering of that wealth among citizens known to be conservative with their cash may limit any benefits.

“You should have a gradual release of savings,” said Davide Oneglia, an economist at TS Lombard. “Perhaps less pronounced than many expect, because a lot of these savings are sealed in a sector where households are particularly wealthy and less inclined to consume.”

What Bloomberg Economics Says...

“We estimate 300 billion euros more than might normally be expected poured into bank accounts last year. That cash pile is the biggest upside risk to our economic forecasts, if only consumers feel safe enough to spend it.”

-Maeva Cousin. To read the full report click here

Deutsche Bank AG estimates pent-up demand could add about 1 percentage point to 2021 growth -- a sizable chunk for an economy the International Monetary Fund sees expanding 4.4%. UBS Group AG economist Dean Turner sees savings constituting a “substantial proportion” of the post-pandemic rebound, with consumer expenditure growth of 2.9% this year.

Such a quantum would be critical to fueling a euro-area boom, not least because the region needs additional growth drivers as its recovery, hindered by slow vaccinations, lags that of the U.S. and China. Germany’s prolonged lockdowns prompted research institutes there to cut their joint 2021 growth forecast by a full percentage point to 3.7% on Thursday.

Retail-sales data for the euro-area show spending on goods has generally held up well, even during later lockdowns. But it’s less clear how much of a rebound there will be in consumer-facing services when businesses reopen.

Policy makers aren’t holding their breath. European Central Bank data show extra cash chiefly accrued to those older than 50 over the past year, while people aged 16 to 49, with a greater propensity to spend and a higher risk of unemployment, saw their financial situation deteriorate.

For Gloria Sattél and Alfons Pribek, an Austrian couple whose pre-crisis spending habits included frequent restaurant meals, regular opera and theater visits, week-long spa stays twice a year and also trips to Greece, Germany and France, an end to lockdowns might not revive their old consumption habits any time soon.

“We’ll be heading to the spa as soon as it opens, but beyond that we’re holding off on planning anything,” said Sattél, 78, who lives with her 81-year-old husband in central Vienna. “We’ve been generous with ourselves in the last year, but there’s money left over and there simply won’t be that many opportunities to spend it.”

With such people in mind, the ECB is taking a cautious view. Its latest forecasts assume the savings rate, which nearly doubled to 25% during lockdowns last year, would eventually return to pre-crisis levels -- while excess hoarding during the period wouldn’t be substantially reduced.

Cash Hoard

The sheer size of the cash hoard waiting on the sidelines is giving some euro-zone officials pause for thought about the possibility of a spending binge. The Bundesbank reckons excess savings in Germany increased by 110 billion euros last year, and its counterpart in France estimates households there hoarded as much as 120 billion euros.

Even so, a recent German survey suggests pent-up demand is much lower than additional savings. There’s also the issue of economic uncertainty, which may brake spending, particularly if people worry their jobs might be on the line once labor-market support programs expire.

“The absolutely key factor for transforming these savings into spending and direct support for activity is confidence,” Bank of France Governor Francois Villeroy de Galhau told France Culture radio this week.

European Commission data show euro-area households’ savings patterns are improving though their interest in a major purchase over the next 12 months is still only somewhat above average.

“People are aware that a lot of government support underpinning the economy and the labor market specifically will have to be unwound,” said Aline Schuiling, economist at ABN Amro Bank NV. “So they’re cautious about spending money on things that aren’t essential.”

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