A global upswing could depend on how freely households spend

This resulted in many consumers – especially the middle and wealthy – having less debt and more money to burn as restrictions on activity were relaxed.

If they open their wallets willingly, it could spark a surge of pent-up demand that leads to strong growth in the short term. If they hold back, however, they will initially hold back economic recovery, but will have fuel to spend more in the long run.

Data from some countries suggests the rapid recovery is happening in part: in the US, the seasonally adjusted and annualized personal savings rate rose to a record 33.6% in April when restrictions peaked, but fell to 14 in August, 1%. This is still well above the 8.3% rate in February before the pandemic broke out, suggesting that while households spent more money in late summer than in spring, they had not fully resumed their old habits.

A look at some other savings rates around the world reveals the challenge policymakers face in getting consumers to loosen their purses.

The Japanese government handed out the equivalent of US $ 950 to each resident earlier this year. In a survey by the NLI Research Institute, half said they would set it aside for daily household expenses – including savings – and a quarter said they would save it right away, according to a July report from the institute’s Naoko Kuga.

“The fact is, it has been difficult to actually spend a lot of money,” said Stephen Halmarick, chief economist at the Commonwealth Bank of Australia.

“Trust is also fragile, and no one knows how long it will be before we get a vaccine and learn to live with the virus. Therefore it makes a lot of sense to save a good part of the income flow. ”

The share of household savings in income in Australia rose to 19.8% in the second quarter, compared to 3.6% in the last three months of last year, while in Canada the savings rate rose to 28.2% in the second quarter 3.6% in the previous year at the end of December.

“Policymakers can try to encourage spending, but you can’t force spending,” said Tom Porcelli, chief US economist at RBC Capital Markets.

Australia’s experience during the financial crisis more than a decade ago and again during the coronavirus pandemic shows that consumers don’t always play ball. The federal government’s response to the height of the crisis in late 2008 and early 2009 included childcare discounts, tax breaks and a one-time cash payment of A $ 900, equivalent to $ 654, to individuals.

However, the savings rate remained elevated beyond the period in which households received the income boost along with interest rate cuts. This indicated a more radical change in behavior, Australian tax officials said in a 2012 review paper.

Increasing the savings rate from a low level can be beneficial. Households with more savings have a larger buffer to fall back on when there are more economic shocks. Additional deposits can make the financial system more resilient by reducing banks’ reliance on short-term wholesale finance.

Still, high savings rates can be a headwind for governments trying to stimulate consumption-driven recovery. The composition of spending can also be problematic for certain industries, for example when consumers withhold bulk purchases such as cars in favor of cheaper items.

The Australian Bureau of Statistics estimates that more than 20% of a government wage subsidy program launched during the pandemic and 40% of the top-up unemployment benefit were saved. This mirror image in the US, where a flood of stimulus money combined with measures like deferred mortgage and student loan payments caused many households to pay off debts.

“It was not the design of the programs to store payments,” said David Rumbens, lead macroeconomic policy and forecasting partner at Deloitte Access Economics in Australia. “The federal government would prefer the money to be used to support the economy.”

He said much of the savings will be made by people whose incomes are not directly affected by the pandemic. “Improving consumer confidence due to an improving economy and fewer restrictions will be key to encouraging this cohort to cut their savings and spend more,” said Rumbens.

John Edwards, a former board member of the Reserve Bank of Australia, said much of Australia’s savings deficit likely resolved in the three months to September, as most of the country’s states and territories reopened and people could get out and spend.

“It shows what an unusual downturn this was – less a recession than a temporary cessation of important parts of the economy,” said Edwards.

Savings rates could stay high for a while if governments provide more financial support and business restrictions remain in place, saving fuel for future growth, economists say.

“The good news is that the surge in savings means there will be a pool of funds available for months or years to come,” said Halmarick, the CBA economist.

– Megumi Fujikawa contributed to this article.

Write to James Glynn under [email protected]