Europe’s depleted Covid savings

Covid-19 has disrupted a lot these past three years, including economic activity and household savings. The savings ratio in the eurozone averaged 12.6% of disposable income from 2015 to 2019. This changed with the onset of the pandemic, soaring to a historic high of 25.4% in Q2 2021. During the Covid lockdowns people were able to buy durable consumer goods, but couldn’t go to restaurants, or on holiday, or even to the hairdresser in most countries. Despite the Covid slump in economic output, most incomes remained intact though... There was also no significant increase in unemployment rates in the eurozone, as governments raced to the rescue with generous furlough schemes.

With spending down and incomes sound, savings multiplied. According to calculations by the European Central Bank^[1] (ECB), so-called excess savings swelled to 11.3% of gross disposable income between Q1 2020 and Q4 2022. Particularly at the beginning of the economic recovery, this was central to the strengthening of private consumption.

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Distribution of cumulated excess savings across household groups

*Deviations from the pre-pandemic trend, percentages of trend disposable income.

Sources: European Central Bank, Eurostat, DWS Investment GmbH, as of 8/15/23

Since then, however, the picture has become more nuanced. Households have invested their excess savings in housing, financial assets such as stocks and bonds, and have paid off loans. Meanwhile liquid assets such as cash or bank deposits, which are also readily available for consumption, have gradually been reduced – from a peak of 3.7% of disposable income in Q1 2021 to just 0.6% in Q4 2022. This means that there are hardly any spare savings or assets left that are readily available to be turned into spending money.

The distribution of excess savings is also important. Calculations by the ECB show that wealthy households are most likely to still have surplus savings in the bank. While the wealthiest 10% of the population held less than half of total excess savings in Q1 2020, this figure had risen to almost two-thirds by Q4 2022.

However, wealthy households tend to have a lower marginal propensity to consume and tend to react only slowly to changes in their wealth. The contrary is generally true for less wealthy and lower-income groups. When they have money, they spend it. All in all, this means that excess savings are no longer likely to provide any additional impetus for consumer spending and growth. But with inflation set to fall significantly in coming months, at least real incomes will rise again. That should help the consumer and the economy a bit. But the Covid windfall is over.