Europe’s consumers bank on their savings

European families are sitting on an ever-growing pile of savings, confounding hopes that consumer largesse can boost the region’s economy as it falls yet further behind that of the United States.

This rise in savings when consumers are enjoying the best income growth in years goes against textbook wisdom on consumer behaviour and has prompted some to question whether there has been a paradigm shift that bodes ill for Europe’s future growth.

Some economists think the world will soon be back to normal, but others see a more permanent shift. A great deal depends on the answer to this puzzle.

If savings, at their highest rate since the worst days of the pandemic, are unwound, growth could take off.

But the absence of the turnaround could prompt businesses, which have been hoarding labour for years, to reduce headcount, further depressing consumption and potentially starting a downward spiral for the economy, according to Reuters.

Euro zone households saved 15.7% of their disposable income in the second quarter – well above levels around 12% before the pandemic – and this rate has been trending up for the past two years.

In Britain, the so-called savings rate was at 10.0% and has also been trending up for years to levels not seen since the pandemic, when consumers had fewer spending opportunities.

In stark contrast, the personal savings rate in the United States has been trending down this year as consumers gain confidence in growth.

The underlying causes are difficult to decipher, because some are temporary while others may be more permanent.

Those who see the trend as temporary say that families are keen to rebuild cash buffers and wealth after the worst bout of inflation in more than a generation. Some are still bracing for the repricing of their mortgages since interest rates have shot up in recent years.

Consumers are also uneasy about war on Europe’s eastern border, volatility in energy prices, the potential impact of the US election, turmoil in the Middle East and the deep industrial recession that could lead to more job losses.

Europe’s savers are also relatively unsophisticated, so high bank deposit rates are also encouraging customers to put cash into term deposits, the Reuters report adds.

But structural shifts are more worrisome. Savers just experienced three once-in-a-lifetime shocks, including the pandemic, Russia’s invasion of Ukraine and inflation, and these could prompt some to be ever more cautious even in the longer run.

Climate change, the decline of the working age population, deglobalisation and the economy’s shift from industry to services also weigh on confidence in a way that is unlikely to reverse quickly.

The German Savings Banks Association recently surveyed consumers on what they would do if they were unexpectedly given 500 euros and most said they would save it up.

Household consumption rose just 0.1% in the second quarter in the EU, while the investment rate has fallen steadily.

There are some encouraging signs on the horizon.

Interest rates are falling, so commercial banks will cut term deposit rates, encouraging some savers to spend.

Sentiment gauges also show a modest improvement in expectations and households are enjoying some of the best income growth in three years or more since inflation is now largely back to 2%.

Indeed, the small surprise in euro zone growth last quarter was due in great part to private consumption, which remained weak but may have bottomed out.

On top of that the labour market remains resilient, despite some softening in surveys and vacancy rates.

“It’s possible that firms could start reducing their workforce in the absence of a recovery, but if that were to happen, that should already be taking place, given two years of near stagnation,” Belgian central bank Governor Pierre Wunsch said.