Lockdowns Give Europe $615 Billion Cash Pile to Aid Recovery

(Bloomberg) -- Europe’s latest lockdowns are presenting citizens with even more hurdles to spending money, swelling already-hefty savings that stand ready to fuel the recovery once vaccines tame the pandemic.

Households in the euro zone accumulated a mountain of cash when businesses shut in the spring. Now in a lengthening second wave of closures, they are sitting on about 500 billion euros ($615 billion) in funds that would otherwise have been spent on restaurants, shopping and travel, according to calculations by Allianz SE.

What happens next depends on whether unemployment can be held in check and the trauma of the pandemic gives way to optimism. Though the cash build-up is unevenly spread, economists are pointing to evidence that consumers will spend again given the chance, as they did in the summer.

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Savings “should start to be reduced from the second quarter of 2021,” said Florian Hense, an economist at Berenberg. Last year’s experience showed that “because the shock was self-inflicted through restrictions that we were able to loosen, there was this pent-up demand that wasn’t there in the financial crisis.”

Allianz chief economist Ludovic Subran estimates that the release of pent-up savings could add 1 percentage point to gross domestic product growth for 2021, based on 25% of that cash pile being spent.

Economists surveyed by Bloomberg currently see the euro-area economy expanding 4.6% this year after an historic contraction of 7.4% in 2020. Bloomberg Economics forecasts a 4.8% growth rate.

Savings Peak

In France, the savings rate -- the share of households’ disposable income that isn’t spent -- almost fell back to pre-crisis levels when shops and restaurants re-opened in the summer. That helped the bloc’s second-largest economy rebound by almost 19% in the three months through September, more than the euro-area average.

After a second savings peak, consumption should spring back into gear as the health situation improves, the Bank of France said on Dec. 14.

The European Central Bank also found in September that consumers mostly hoarded cash unwillingly, and less so out of precaution. The institution said in its latest projections on Dec. 10 it expects consumption to recover this year and surpass its pre-crisis level in mid-2022.

For now, the resurgence of the pandemic, the closing of restaurants and bars, and the limits on travel mean consumers are likely to see their bank balances grow.

Workers are also finding that as businesses adjust their operations and governments do all they can to avoid a surge in unemployment, lockdowns don’t necessarily mean redundancy. Germany reported a surprise drop in unemployment for December -- the sixth straight month of declines -- despite its own heightened restrictions.

A survey from the European Commission in November found that households rated their likelihood to save money over the next 12 months at record highs. And ECB data show that in the year to November, household deposits at euro area banks grew at the fastest rate since 2009.

The risk remains that only a small portion of those pent-up funds find their way back into the economy quickly, as job and income uncertainty remain high. The government furlough programs that have helped secure livelihoods through the lockdowns won’t last for ever.

“I’m not sure it’s a magic potion that’s going to drive the recovery for an extended period,” said Jacob Nell, an economist at Morgan Stanley. “It either drives it very powerfully for a short period of time, or it’ll be a sort of background support over a longer period.”

The uneven distribution of savings also raises questions about how quickly they will be released. A study by France’s Council of Economic Analysis showed that half of excess savings in the first wave fell to the 10% of households with the country’s highest incomes, while the poorest saw their debt rise instead.

According to Germany’s Bundesbank, the concentration of savings among society’s richest could mean that the money simply increases their wealth with little benefit for others.

Depression vs Pandemic

Policy makers will be watching the behavior of households once the pandemic subsides closely for signals on the growth and inflation outlook. It’s a question of historic proportions, according to Bank of England Chief Economist Andy Haldane.

“Is this more like the aftermath of a financial crisis -- slow and steady -- or is this more like the aftermath of the 1918 flu pandemic or a world war, which elicited a much faster release of pent-up demand?” he said in an interview last month.

Whichever way the savings question develops, it’s relevant to inflation. A rapid release of funds could drive faster price gains than currently expected, calling the need for further stimulus by the ECB into question.

Conversely, a permanently higher savings rate risks embedding weaker growth and prices. As it stands, the central bank is pessimistic about achieving its inflation target of just under 2% even three years from now.

“The Great Depression impact is probably greater than the Roaring Twenties impact because we’re assuming precautionary savings are higher due to increasing unemployment,” said Morgan Stanley’s Nell. “But it’s an open question.”

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