'Excess' savings - accelerant or mirage?

With the second wave of the pandemic came the second lockdowns - and now evidence of the second household savings stash, too.

But even as expected spending of trillions of dollars of these "excess" savings stokes economic recovery forecasts, inflation fears and financial markets, some economists suspect large chunks of what look like precautionary buffers may outlive the pandemic itself - or least not find their way to the shops.

Despite the financial distress experienced by many families during the pandemic lockdowns of the past year, most in developed economies worked from home, received furlough payments or direct government cheques. With few services, travel or leisure activities open to spend incomes on, many debts were paid down and aggregate savings and bank deposits ballooned.

As the first lockdowns eased last summer, some - though not all - of that additional buffer was spent - but spurring a dramatic bounce in activity late last year.

Now, US data for January shows the second wave had a similar effect, with household savings as a share of disposable income surging 7 percentage points in the first month of the year - and back above 20% for the first time since May. While shy of the 33% hit last April, January's rate was still higher than in any month in the 60 years prior to the Covid shock.

Boosted by fresh lockdowns and December's "mini" $900 billion government package of supports and direct household handouts, that savings rate translates into almost $4 trillion in total - or more than $2 trillion than the average month of the two years prior to the pandemic and almost 10% of gross domestic product.

If these "excess" savings are fully spent again as the pandemic ends, alongside $1.9 trillion of new government spending and $120 billion per month Federal Reserve bond buying, it risks a sharp rise in inflation, according to economists such as former Treasury chief Larry Summers and ex International Monetary Fund chief economist Olivier Blanchard.

Last week's sudden bond market turbulence showed just how much of a difference that means to investors.

And it's not a phenomenon peculiar to the United States. Although European data lags, estimates show a similar pattern in through last year and into 2021.

A Reuters analysis of the top four UK banks' results shows domestic customers deposited 221 billion pounds of extra cash last year.

Germany's savings rate, which hit records over 20% in the second quarter of 2020, was already climbing back toward that level again in the final quarter and savings for the full year were 111 billion euros higher than in the prior two years.

Deutsche Bank economist Marc Schattenberg estimates that if Q1 is similar to Q2 last year, those 'involuntary savings' will rise to 160 billion euros - at least 30% of which will be spent on conservative estimates.

And if the 'precautionary motive' around job insecurity is overstated, as much as 40%, or 65 billion euros, could be then spent over the remainder of the year - lifting consumption growth to 2% and adding an additional half percentage point to Deutsche's existing 4% GDP growth forecast.

Ricardian Twist

If that estimate seems underwhelming against the US angst, it's partly because Deutsche and others feel the forced savings - whether in the United States or Europe - won't return to pre-pandemic square as quickly as some assume.

Deutsche's central scenario reckons 70% of the 'excess' would remain in household deposits or assets for the time being.

Its rationale is the bulk of 'excess' is skewed to high-income households with a high propensity to save anyhow and the cash will more likely find its way to financial investments.

Shweta Singh, TSLombard's Managing Director, Global Macro reckons this is also true in the United States, where data shows a clear skew in accumulation of liquid assets to the higher earners who mostly kept working and who typically spend more of their incomes on shuttered services.

What's more, she said 2020's durable goods spree is unlikely to be repeated with the same gusto two years in a row.

"Those expecting households to aggressively run down their stock of savings will be disappointed," she wrote. "There could be a burst of inflation in the immediate term, especially in the services sector, but it will be short-lived until there is a meaningful improvement in the labour market."

And then there's the thorny issue of so-called "Ricardian equivalence", a theory posited by 19th century economist David Ricardo suggesting government debt is largely just what citizens owe to themselves - and people save more when governments spend alot to prepare for future tax rises to fix public finances.

In a paper this week dismissing the idea of this savings build as "excessive", professors Florin Bilbiie, Gauti Eggertsson and Giorgio Primiceri said the saving build was the accounting flipside of the trillions of extra government spend.

They said the theory doesn't work in lockstep in practise and surveys show those who received cheques last year spent between 25-40%. But if the bulk of 'forced savings' are with high earners, they are also the ones likely to be targeted with higher taxes and more likely to behave in a 'Ricardian' way.