Pandemic-era lockdowns and government stimulus have left euro zone citizens with 1 trillion euros in extra savings. In the U.S., a similar cash bonanza fuelled a consumption spree that’s keeping inflation high. Europeans, however, are likely to hold on to the cash. That will leave consumer goods giants like $445 billion LVMH (LVMH.PA) downcast, but the European Central Bank pretty pleased.
Money, as the old saying goes, can’t buy you happiness. But two years of unhappiness can leave you with a lot of it. The human and social tragedy of the Covid-19 crisis, followed by the energy shock caused by Russia’s invasion of Ukraine, boosted the amount of European households’ “excess savings” – the cash accumulated over and above the pre-pandemic norm.
Euro zone citizens put as much as 1 trillion euros – or 8% of GDP – in their piggy banks since the health emergency, according to Oxford Economics’ estimates. Those funds came from two main sources: forgone consumption and government help. As countries imposed lockdowns that shuttered vast swathes of their economies, consumers had fewer opportunities to spend money.
Thanks to $5 trillion in fiscal support doled out by the White House since 2020, U.S. citizens’ excess savings grew even bigger. They peaked at around $2.1 trillion – around 9% of GDP – in August 2021, according to a recent study by the Federal Reserve Bank of San Francisco. Americans’ response to the federal injection of cash was unlike anything seen in previous periods of economic hardship. Instead of nibbling away at their savings slowly, like they had done in every recession since the 1970s, U.S. consumers hit the malls, online shopping sites and the beach as soon as lockdowns eased. In less than two years, they have spent $1.6 trillion of their excess savings, the San Francisco Fed estimates.
This shopping splurge has had a positive effect on economic growth. Inflation-adjusted personal consumption expenditures – which account for around two-thirds of U.S. GDP – rose by 27% between April 2020 and March 2023, compared with just 7% between 2017 and 2020. That helped boost the profits of companies who sold the services and wares Americans craved, from electric car maker Tesla (TSLA.O) and supermarket giant Walmart (WMT.N) to United Airlines (UAL.O) and American Airlines (AAL.O).
The flip side, though, has been stubborn inflation, especially in the services sector. Prices for services excluding energy rose at an annualised 6.8% in April, a major reason why overall inflation – at 4.9% – remains well above the U.S. Federal Reserve’s 2% target.
European consumers are unlikely to follow their U.S. peers down to the mall or the beach, for three main reasons. First, there is evidence that in Europe it was richer households who saved the most during the pandemic. That’s because the euro zone fiscal stimulus was smaller than in the U.S. and didn’t include direct transfers such as stimulus cheques mailed to low- and middle-income citizens. European data on savings’ distribution are fuzzier than U.S. ones, but Allianz estimates that the richest 20% of consumers held around two-thirds of savings in Germany, France, Italy and Spain at the end of last year. These people are more likely to use the windfall to add to their wealth than support consumption because they already have a lot of goods and services.
Secondly, there has been an ongoing war at the continent’s borders. That’s added the continued risk of another energy crisis. High consumer prices and tightening credit conditions also suggest Europeans will keep their money in their pockets.
Finally, euro zone savers have been favouring the higher returns offered by illiquid assets instead of sticking with easily accessible cash. Admittedly, overnight bank deposits, the safest and least remunerative form of savings that doesn’t involve a mattress, soared by 5.5% of euro zone GDP in early 2021 – more than double the average between 2000 and 2019, according to Société Générale estimates. But as of end-2021, equity and investment fund shares had overtaken currency and deposits as the largest asset for euro zone households for the first time since 2008, according to official data. These investments account for 33% of euro zone citizens’ total financial assets, compared to 30% before the pandemic.
Such parsimony is welcome news for ECB President Christine Lagarde. She has raised the cost of money by 375 basis points since July 2022, taking the deposit rate from negative to 3.25%. Yet inflation still rose at an annual rate of 6.1% in May, more than three times the ECB’s 2% target. Less spending by consumers should pave the way for lower prices, especially for services, where inflation has been accelerating since last year, rising from an annualised 3.5% in May 2022 to 5% last month.
Shareholders and chief executives of companies selling goods and services may have to worry, however. Consumer discretionary stocks like LVMH and Germany’s BMW (BMWG.DE) have led European shares higher this year, rising by more than 20%, while service providers such as airlines have enjoyed bumper profits. Once post-pandemic demand is exhausted, though, these companies may struggle to extract money from stingy savers.
Granted, luxury groups and carmakers derive a sizable portion of their revenues from Asia, and they are more likely to persuade richer households to part with their cash. And airlines can hope that businesspeople and non-European tourists keep taking to the skies. But if Europeans decide not to live the American Dream and tighten their belts instead, the economy and companies’ bottom lines will feel the pinch.
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