The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.
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.
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
In the United States it is not very different. The alleged “savings glut” amounts to less than 5% of a household’s average annual disposable income, and that is before adjusting for those that have seen lower real wages and bonuses.
A large part of savings in deposits comes from the stimulus checks. The massive rise in savings comes precisely after those checks. As such, we can gather two lessions: Americans are saving because the employment situation remains weak and uncertain, and the “abnormal” figure of savings comes mostly from an abnormal one-off payment.
With US Continuing Claims for Unemployment Insurance at 4.494 million as of February, 6th still up from 1.678 million from one year prior, and unemployment rate at 6.3% and civilian labor participation rate falling to 61.4% in January, expecting a boom in consumption may be wishful thinking.
Americans and Europeans are not saving because they are stupid or uninformed, but because their overall economic and work situation has deteriorated significantly. Additionally, now that inflation is creeping up, especially for essential goods and services like food, energy, education, healthcare and utilities, we have to wait at least until a full economic recovery happens to believe that those so-called “savings” translate into a consumption boom.
The history of previous crises, even pandemic crises, tells us that the recovery has been weaker, with less productivity growth and lower real wages every time in the past 50 years. To believe that this wall of savings is meaningful or extraordinary without adjusting for real disposable income and economic conditions may be a grave mistake.
Citizens save to survive, not to hoard cash.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.
