(News Bulletin 247) – A recent study by the San Francisco Fed shows that the savings accumulated in reserve during the pandemic by American households have now disappeared. In Europe, there still seems to be a remainder. But this savings will not provide support to the economy and therefore to the market.

This was a factor that helped cushion the economic shocks that followed the pandemic: Covid savings. These savings were accumulated during the health crisis by households, when they benefited from various support measures from governments even though their spending was, by nature, constrained by health restrictions.

“Excess savings have reached almost 10% of GDP in the United States – where public aid has been particularly generous – and around 7% in Europe,” underlined Société Générale Private Banking in a presentation dating from March.

This excess savings then made it possible to smooth out the negative impacts linked to inflation and rising interest rates. This has fueled the market’s hopes of a “soft landing” for the economy, with central bank key rates peaking without too much harm to households and businesses.

“These safety nets constituted one of the particularities of the post-Covid recovery: they allowed households to attenuate the shocks linked to the rise in inflation and interest rates. In particular, American households have largely drawn on this excess savings to finance a spending boom,” explains Société Générale Private Banking.

>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio

Household debt is increasing

For example, this could have boosted the luxury sector. “The exuberant growth in demand for luxury goods post-Covid-19 has, in our view, been fueled by ‘revenge buying’,” HSBC noted in January. Clearly, some consumers purchased luxury products after restraining themselves during the health crisis. The leisure and hospitality sector has seen “revenge travel” in 2022 and 2023, that is to say travelers who have spent a lot after years of staying in their countries of origin.

The fact remains that this Covid savings has now disappeared, at least in the United States. At the beginning of May, the Federal Reserve of San Francisco published a study showing that these nest egg, after peaking at $2.1 trillion in August 2021, were exhausted last March. The figure even became negative at $72 billion. Which means that the gap in household savings compared to its historical average has become negative.

With the decline in Covid savings, Americans have activated other financing levers, such as debt. At the end of 2023, household debt cumulatively amounted to 17,503 billion dollars, an increase of 604 billion over one year. Liabilities drawn on credit cards reached 1,130 billion, or 143 billion more than at the end of 2022.

A record in absolute terms, according to CNN, which is however nuanced: when adjusting for inflation, this figure remains 20% lower than the 2008 record.

“Consumers still have a lot of money to spend, which is why credit card data is often misinterpreted,” Russell Price, chief economist at Ameriprise Financial, told CNN. “The dollar value of credit card debt is at an all-time high, but so are population, employment and consumer incomes,” he adds.

John Plassard, investment advisor at Mirabaud, emphasizes that the American job market has remained very solid in recent years, which could help consumers maintain their spending even though Covid savings are no longer there. . American households can also draw on savings not linked to the pandemic, such as gains recorded on their stocks in 2023, or on non-financial assets.

“In conclusion, despite the (theoretical) end of additional savings accumulated during Covid, it is far too early to bury the growth of the world’s largest economy,” underlines John Plassard.

Savings on assets that cannot be mobilized in Europe

Data from the San Francisco Fed in any case underlines that Covid savings indeed seem to be exhausted. The American Federal Reserve (Fed), and not one of its local branches, estimated that this windfall had disappeared in the first quarter of 2023 in the United States.

The difference in evaluation between the two Feds in the United States was explained, according to Capital Economics, by a divergence on the definition of “excessive savings”, with savings trends in normal times lower in the estimate of the San Francisco Fed.

In the euro zone, Covid savings do not seem to have completely disappeared. In November, economists from the European Central Bank still estimated, on a blog, excess savings at around 2-3% of household disposable income, at the end of June 2023. According to a note from Rothschild & Co in March, the amount still exceeded 1,000 billion euros at the end of the third quarter of 2023.

But the bank’s chief economist, Marc Antoine Collard, wrote that this savings would probably not boost the economy.

“Investors’ idea that a significant release of excess savings will provide an additional boost to consumption could be misguided, as households have not decided whether to keep their money in cash or bank deposits, rather than in bank deposits. ‘They can easily liquidate to buy goods and services, but have instead invested in long-term, more illiquid financial assets, such as stocks and bonds, or in purchasing non-financial assets such as housing “, he explained.

“Moreover, households at the top of the income distribution hold the bulk of excess savings and also have the lowest propensity to consume, that is, they tend to spend less for each additional euro of disposable income”, added the economist.