Excess savings accumulated during the COVID-19 pandemic could pose a threat to the global economy’s recovery, as cash piles built by households are rapidly diminishing due to soaring inflation and rising interest rates. The reduction in these savings cushions is already being observed, with estimates showing that U.S. excess savings have fallen from around $2.1 trillion in August 2021 to approximately $500 billion. In Europe, similar trends are seen, with excess savings dwindling in Sweden and British households withdrawing money from savings at a record pace.
While the end of excess savings is not expected to cause a recession, it may result in a spending downturn that could lead to a downward spiral of falling business investment and high unemployment. In light of this, investors are turning to government bonds as a safe-haven investment during recessions, while consumer-oriented stocks and high-yield credit assets are being avoided.
The reduction in excess savings is expected to impact domestic consumption, which plays a significant role in economies such as the United States, the United Kingdom, and the Eurozone. As consumer savings wear down and disposable incomes are squeezed, businesses in the consumer discretionary sector, such as carmakers, and those selling consumer staples like cleaning products and food could experience a hit to their profit margins.
Amid concerns about the depletion of excess savings, caution is prevailing in the market. Business activity data suggests a weakening in the previously resilient services sector, and both European airline Ryanair and JP Morgan CEO Jamie Dimon have acknowledged the slow depletion of consumer cash buffers. Even Unilever, the maker of Ben & Jerry’s ice cream, has noticed a cautious Chinese consumer, despite previous expectations of increased sales due to excess household savings in China.
Investors are closely monitoring job markets, which have remained robust in developed economies, but weaker consumer spending may help cool inflation. Consequently, there is a preference for holding government bonds, particularly in countries like the United Kingdom and Australia, where shorter mortgage terms make households more sensitive to interest rate fluctuations. The anticipation of higher housing costs and reduced consumer spending could prompt central banks to believe they have done enough and potentially act sooner than later.
While the timing of recessions is difficult to predict, investors are focusing on duration, referring to the interest rate risk associated with longer-term bonds, as it may yield favorable results in the current economic climate. However, it is worth noting that maintaining a balanced view is crucial, as there are different perspectives and opinions on the matter.
In conclusion, the decline in excess savings resulting from the COVID-19 pandemic has raised concerns about a potential slowing of economic recovery. As consumer savings diminish, the impact may ripple through various sectors and lead to a downward spiral in business investment and employment. Investors are responding cautiously, favoring government bonds and expressing concerns about businesses tied to consumer spending. Meanwhile, the consumption outlook remains uncertain, and the potential for a recession is being closely monitored.
