Governments today are slowly easing lockdowns, as vaccines reduce hospitalisations and deaths from covid-19. Attention is turning to the likely shape of the economic recovery. The big question is whether or not the rich world can repeat the post-war trick, with pent-up savings powering a rapid bounce-back.
Households have certainly accumulated lots of cash. Here is data on personal saving—the difference between post-tax income from all sources and consumer spending—for 21 rich countries. Had the pandemic not happened, households would probably have stashed away $3trn in the first nine months of 2020. In fact, they saved $6trn. That implies “excess saving” of about $3trn—a tenth of annual consumer spending in those countries. Households in some places have built up bigger cash piles than in others (see chart 1). In America, excess savings may soon exceed 10% of GDP, in part because of President Joe Biden’s $1.9trn stimulus plan, which passed the Senate on March 6th.
Households do not usually save on such a scale during recessions. For one thing, their incomes usually fall, as their pay is cut or they lose their jobs. But governments in the rich world have spent 5% of their combined GDP on furlough schemes, unemployment benefits, and stimulus cheques during the pandemic. As a result, household incomes have actually risen in the past year. At the same time, lockdowns have reduced opportunities to spend.
The reality will be somewhere in between. Research by JPMorgan Chase, a bank, suggests that in many rich countries consumption will soon rebound to near its pre-pandemic level, powering a strong global recovery. Goldman Sachs, another bank, reckons that in America the spending of excess savings will add two percentage points to GDP growth in the year after full reopening. That points to a fairly rapid recovery in both output and employment. On March 9th the OECD, a rich-country think-tank, upgraded its forecast for GDP growth for the G20 group of countries to 6.2% in 2021, arguing that household savings represented “pent-up demand”.
Such calculations are highly uncertain, however, and not only because there are few precedents apart from the second world war. Two factors matter: how the accumulated pots of cash are distributed across households; and whether people treat those pots as income or as wealth.
Take distribution first. There seems little doubt that in all rich countries wealthier people have accumulated much of the excess savings. They have been the least likely to lose work. A big share of their spending is discretionary, say on holidays or meals out, and it is many of these services that have been shut down during the pandemic. A large chunk of savings in the hands of the rich limits the potential for a post-lockdown spending bonanza because the evidence suggests, they have a lower propensity to spend what they earn.
America looks different. Its fiscal stimulus has been unusually generous. The third round of cheques, for $1,400, will soon be sent to most adults. Top-ups to unemployment benefits have ensured that many people who lost work have earned more from the state than they had in their jobs. The result is that low-income Americans may have saved even more than the rich, relative to their incomes. A new study by the JPMorgan Chase Institute found that in late December the poorest Americans’ bank balances were some 40% higher than the year before, compared with about 25% higher for the richest (see chart 2). The poorest half have seen their liquid assets rise in value by 11% in the past year, nearly twice the increase for the richest 1%. Low- and moderate-income earners are more likely to spend their savings once the economy reopens, fuelling the recovery.
There is greater uncertainty around the second factor influencing the recovery: whether households perceive their cash piles as income or wealth. This is not merely a semantic distinction. Many studies find that households are more likely to boost spending in response to an increase in income (say, a pay rise) than they are for an increase in their wealth (say, a rise in the value of their house). Households have built up excess savings in different ways in different countries. Those in Britain and the eurozone have done so by spending less. People are unlikely to treat this as “additional income”, argued Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee, in a recent speech. In America and Japan, by contrast, excess savings are a result of higher income owing to stimulus payouts, not spending cutbacks. In that situation, Mr. Vlieghe said, excess saving “can more reasonably be interpreted as ‘additional income’”, which consumers may be happier to spend.
And that points to a striking contrast with the post-war boom. America’s recovery was impressive enough, but Europe’s was even more so, with GDP growth running 50% faster throughout the 1950s. This time is different. As the pandemic wanes it is America, where more stimulus is in place and where consumers are likelier to spend it, that seems set to leave the rest of the rich world in its dust.