A popular topic among economists and investors alike is when will normal life resume? More precisely, how long will the recession affect the global economy?
If we look at how the European consumers chose to deal with their savings, the answer is that people hold back on their consumption. Fear and uncertainty about the future are stronger than any incentive to go out and spend.
Huge Surge of European Saving
In Europe, there’s been a huge surge in saving. With the exception of Germany, which opted for cash, month on month change in European countries’ bank deposits show dramatic growth in bank deposits when compared with the long term average, which can be seen as bad news for a quick economic recovery.
What’s interesting is that, historically, consumptions and exports tend to lead Europe out of recessions.
A recent study by McKinsey shows that in the last three recessions in Europe (1974, 1992, 2008), household consumption in the first year of recovery jumped to 2.5% as part of GDP, contributing to almost 5% in the final GDP number for the year.
Judging by the recent bank deposits data above, the consumer is not there yet. Moreover, households show up with their money not only to deposit funds, but to also buy sovereign debt!
Italy, for instance, sold EUR 22.3bn in inflation-linked bonds this May, only to domestic savers and investors. More than half of that amount (EUR 14bln) was bought by the Italian retail sector.
Before interpreting these numbers as too high or too low, consider that Italian households have total financial assets of EUR 4.4 trillion. Only six percent of these assets are in bonds, the rest in shares and deposits.
If we extrapolate the numbers to other European countries, we see the potential impact of households consumption on European economic recovery. In other words, the money exists, but it is not spent into the real economy. Instead, people decide to save it or to buy fixed income products to protect them from future inflation.
This brings us to what central banks fear most – money creation is not enough if there’s no spending. Spending cannot rise if there’s no confidence in the economic recovery.
Therefore, investors should keep an eye on potential changes in consumer behavior. If household consumption picks up, it historically led Europe out of recession.