Inflation and Economic Uncertainty Drive Euro Area Savings Increase

January 14, 2025 — After a sharp decline following the pandemic-induced surge in 2020, the household saving rate in the euro area has risen noticeably again over the past two years, despite sluggish consumer spending. This trend raises important questions about the near-term outlook for private consumption and the broader economy, a bulletine article from the European Central Bank (ECB) states.

The ECB article states that data from Eurostat reveals a dramatic spike in household savings after the onset of the COVID-19 pandemic. Lockdowns significantly curtailed consumption opportunities, while government support measures bolstered disposable incomes, leading to a substantial increase in savings. By mid-2022, as restrictions eased, the saving rate returned to its pre-pandemic average. However, it has since climbed again, contrasting with weak consumer spending.

According to the authors, several key economic factors explain this recent uptick in saving. Strong income growth has played a significant role, with real household income increasing by 3.8% over the past two years. This growth is driven by both labor and non-labor income, including income from self-employment, interest, dividends, and rents. The increase in non-labor income is particularly relevant for savings, as this type of income tends to accrue to wealthier households, who generally save a larger proportion of their income. Fiscal policy measures, particularly non-targeted income support implemented to mitigate the energy price shock, have further contributed to real income growth, disproportionately benefiting higher-income households and further fueling savings.

The ECB article states that despite rising incomes, households have adopted a cautious approach to spending. Following a post-pandemic rebound, real private consumption growth weakened considerably due to surging inflation and subsequent monetary policy tightening. The sharp rise in energy and food prices led to a significant decline in consumption of these essential goods. Rising interest rates further incentivized saving and likely dampened spending, particularly on durable goods, which are more sensitive to interest rate changes than services. Overall, goods consumption fell below pre-pandemic levels at the start of 2023 and has stagnated since, while services consumption has continued to grow, albeit at a slower pace.

The surge in inflation has also eroded households’ real net wealth, which includes assets like real estate, deposits, bonds, and shares, minus debt, the article states. While nominal net wealth continued to grow moderately after the pandemic, in real terms, it began declining in 2022, returning to pre-pandemic levels by 2023. This decline has likely motivated households to increase their saving rate to rebuild their wealth.

Looking ahead, the euro area household saving rate is expected to remain elevated in the near term, the authors state. Factors such as continued real income growth, high real interest rates, and the desire to rebuild wealth are likely to persist. However, a gradual decline from the current peak is anticipated, partly reflecting moderating interest rates. This expected decrease in the saving rate, combined with continued strong growth in real labor income, is projected to support a recovery in private consumption in the medium term. This suggests a potential shift from saving to spending in the future, which could provide a much-needed boost to the euro area economy.

More News