Column: Spend or hoard? Fate of forced savings could
define pandemic recovery - Mike Dolan
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[June 03, 2020] (The
author is editor-at-large for finance and markets at Reuters News. Any
views expressed here are his own)
By Mike Dolan
LONDON (Reuters) - Many households have
built up a stash of savings during the coronavirus lockdowns of the past
three months -- and how they view them may dictate the speed of recovery
from the pandemic.
Although the shock has caused spikes in unemployment, most households
spent lockdown periods either working from home, furloughed or on direct
government income support. And with few goods or services available to
buy, their savings have soared.
Whether people see these unexpected cash hoards as a windfall or a
buffer against future uncertainties is likely to determine the speed of
the recovery, at least this year.
If the public treats the money like a tax rebate, spending could surge,
says Paul Donovan, chief economist at UBS's global wealth management
arm. He points to U.S. tax rebates in 2001 and 2008, money from which
was fully spent within about two quarters -- mostly on durable goods
such as furniture and consumer electronics.
As lockdowns lift with no second wave of virus infections so far,
pent-up spending could be a big boost to third-quarter consumption --
underlining why some investors still believe in a "V-shaped" recovery.
"This involuntary saving could be spent. It will depend on fear and
trust," Donovan said. "Fear of the virus and fear of unemployment need
to be low. Trust in government policy needs to be relatively high.
"These are, after all, savings that many people never wanted in the
first place -- at least as far as saving on entertainment and services
is concerned."
CASH STASH
U.S. Bureau of Economic Analysis data last week showed the personal
savings rate almost trebled to a record 33%, or $6.15 trillion, in April
-- having already doubled to more than $2 trillion in March. In the six
months before, the average was nearly $1.3 trillion, or just under 8%.
Directly comparable data for Europe, which locked down earlier, is not
yet available, but the European Commission is forecasting that household
savings rates will nearly double to 20% this year. Bank of America
meanwhile points to a record jump of over 300 billion euros in euro zone
private sector deposit inflows in March, although that will include
firms building up cash to survive the freeze.
And on Tuesday, Bank of England data showed UK household deposits rose
by 30 billion pounds over March and April compared to average monthly
increases of 5 billion pounds in the six months prior. There was also
record net repayment of consumer credit of 7.4 billion pounds in April
alone.
Donovan notes that despite the large aggregate numbers, the distribution
is scattered.
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George Washington is seen with printed medical mask on the one
Dollar banknotes in this illustration taken, March 31, 2020.
REUTERS/Dado Ruvic/Illustration/File Photo
For many furloughed workers in Europe, for example, income has been at 80% of
normal levels. But spending has probably declined by 20-30% across the major
economies.
Some American households may even see a temporary rise in weekly incomes as they
claim jobless benefits of $1,000 per week -- higher than half of all working
wages. They also get a $1,200 one-off government payment.
It is higher income groups that tend to save more, however, as they spend a
smaller share of their incomes on food and essentials. Much of that
discretionary spending is on services such as travel, restaurants and
entertainment that have largely been unavailable during the crisis.
POLICY TWISTS
While major uncertainties remain about the reopening of economies, job security,
the trajectory of the virus and a potential vaccine, government and central bank
policies will help determine whether this money leaves bank accounts as quickly
as it arrived.
Harvard economist Kenneth Rogoff argues that preventing cash hoarding is one
reason why the U.S. Federal Reserve should consider adopting negative interest
rates -- effectively a charge for not spending -- as European central banks have
done.
Others fear zero and negative deposit rates just lead to a "paradox of thrift",
where people put aside even more to make up for lost returns -- further swelling
the savings glut.
For governments, the issue may also inform post-pandemic support. With private
consumption the main driver of economic activity -- as high as 70% of GDP in the
United States -- Barclays economists say changes in savings patterns could
easily offset any new fiscal measures.
They argue that fear of future tax rises to fix public finances could prompt
household caution -- so-called "Ricardian equivalence", a phenomenon sketched by
19th century economist David Ricardo suggesting the public's behaviour in
response to government saving or borrowing offsets the impact of policies.
What is clear is that current bloated savings levels mean confidence, or lack of
it, could have a snowballing impact in the second half of 2020. Financial
markets are already taking that on board.
(By Mike Dolan, Twitter: @reutersMikeD; Editing by Catherine Evans)
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