The key chart
The key message
The overriding message from the European and UK money sectors remains one of heightened uncertainty and deficient credit demand. Narrow money (M1) is playing an ever-increasing role in broad money (M3) growth despite negative real returns on overnights deposit as the household propensity to save reaches unprecedented levels in response to COVID-19.
The key unknown here is the extent to which the increase in savings is “forced” or “precautionary”. This matters because forced savings can be released relatively quickly to support economic activity while precautionary savings are unlikely to move straight into investment or consumption.
In the latest Economic Bulletin, ECB economists estimate the contribution of both factors to the increase in savings during 2020. They conclude that the rise in expected unemployment has led to a significant contribution of precautionary savings but that this alone cannot explain the increase. In contrast, they argue that, “forced savings seem to be the main driver of the recent spike in household savings” (see graph below).
Despite this, they point to considerable uncertainty regarding pent-up demand in the short term. Recent CMMP analysis has highlighted a v-shaped recovery in EA consumer credit with monthly flows recovering to just below their 2019 monthly average.
Counterbalancing these ST trends, the EC consumer survey covering the period to August 2020 suggests that in the next twelve months HHs expect to spend less on major purchases than at the beginning of 2020, despite the amount of savings they have accumulated.
It is hard to argue against the ECB’s conclusion that, “over the next year, precautionary motives may still keep households’ propensity to save at levels that are higher than before the COVID-19 crisis.”
Inflation hawks will need to be patient!
Please note that the summary comments above are extracts from more detailed analysis that is available separately.