The Private Sector Might Tap Into Savings, Unlike 2008

US savings rates are deteriorating the question of household sav- ings behaviour will be decisive

As restricted economies begin to reopen, a wind of optimism is blowing in the markets, which seem to be expecting a rapid recovery. These hopes are boosted by the prospect of the availability of a Covid-19 vaccine by early next year. Our macro- economic scenario envisages a highly contrasted situation depending on the country. On the one hand, in our view, several governments underestimate the loss of income caused by the temporary closure of the economy and, above all, the effects on the most affected private agents in terms of their ability to resume normal activity. Admittedly, in the short term, employees have been compen- sated by temporary unemployment measures. In the United States, in absolute terms only the rich- est 20% of households have suffered a significant loss of income and wealth so far. However, several support programmes are temporary in nature and are due to expire soon. It is therefore crucial that temporary lay-offs do not become permanent. On the other hand, bankruptcies are only just beginning. Although the pandemic crisis will only accel- erate the fall of doomed business models, for ex- ample in the retail sector, these business failures will nevertheless put a damper on the recovery. An- other crucial feature of the current recession is its impact on service activities. Indeed, the historically unprecedented plunge in indicators can be explained by the fact that in most recessions it is the manufacturing and construction sectors that are affected.

This time around, social distancing has hurt many sectors that were previously immune to a crisis. The impact on consumption, which is usually very resilient, has been massive! Thus, in the short term, spending has fallen and the incomes of most households (in developed economies) have been preserved. As in 2008, the household savings rate has risen sharply in the short term, helping to strengthen household balance sheets. In the second stage, however, the question of household savings behaviour will be decisive. If the job losses are not quickly recouped, it must be expected that individuals will use their savings to support their consumption levels within a context of reduced incomes. This is a fundamentally different situation from the 2008 crisis when households (and companies, for that matter) had increased their savings sharply to compensate for the negative wealth shock resulting from the real estate and financial crisis. At the same time, government budget deficits will explode to levels of 10% to 20% of gross domestic product (GDP). The financing of these deficits will require access to borrowing, and in the context of reduced private savings, interest rates could start to rise. In this event, yield curve control by central banks could happen earlier than expected.