Europe’s Economic Recovery Hopes Are Riding on Unlocking Covid-19 Savings Stockpile

The eurozone’s household savings rate jumped to 25% in 2Q 2020, almost double the pre-pandemic long-run average, according to UBS data.

When the pandemic hit Europe, Pablo Jimenez continued working as usual in his job as a computer scientist, albeit remotely. He was living in Madrid at the time but decided to quarantine in his parents’ home in Zamora, a smaller city in the west of Spain. He didn’t leave the apartment for four months and didn’t have many expenditures–his bank account grew steadily.

Since the onset of the Covid-19 pandemic, household savings have surged at an unprecedented rate, fueled by restricted spending opportunities, combined with increased precautionary deposits owing to concerns about unemployment. Economists expect a strong rebound in private consumption thanks to those savings once restrictions are lifted, which should provide a much-needed boost to the economic recovery.

“Household consumption accounts for over 50% of GDP, and is therefore crucial for the pace of the recovery,” Anna Titareva, European economist at UBS, said.

Mr. Jimenez tracks his expenses carefully in a spreadsheet. During the lockdown, he continued to rent his apartment in Madrid for 500 euros a month, equivalent to $590 a month, while his average monthly food expenses came to 120 euros. Adding other minor costs, he spent 800 euros a month on average during the first lockdown. Before the pandemic, he was spending double that.

The household savings rate in the eurozone rose to 25% in the second quarter of 2020 amid the first lockdown when people didn’t have the option to spend on restaurants or travel, implying savings of 25 euros out of every 100 euros in disposable income. This was almost twice as high as the pre-pandemic long-run average of 13%, Ms. Titareva said.

A one-percentage-point decline in the eurozone savings rate would raise spending by around 19 billion euros, boosting the economic recovery, economists at UBS said. If the savings rate returned to its 2019 level of 12.9%, this would lift spending by 162 billion euros, or 1.4% of GDP, UBS said.

While the surge in U.S. households’ savings mainly reflects government transfers via stimulus checks and unemployment benefits, the rise in Europe has been primarily due to the sharp fall in spending, particularly on services that involve a high degree of social interaction, Daniel Vernazza, chief international economist at UniCredit, told The Wall Street Journal.

Since the start of the pandemic, eurozone households have accumulated 655 billion euros or 5.8% of GDP in excess savings, according to UBS’s calculations. In the case of the U.K., a report published by the Resolution Foundation showed total household wealth increased by almost 900 billion pounds ($1.234 trillion) during the pandemic, representing a 6% increase on pre-pandemic levels.

Angela Caballero started teaching private online English classes and moved to her parents’ apartment in Murcia in southeast Spain, after the school in Valencia where she had been teaching was shut. She had been left with a monthly income of just 400 euros, less than half of what she was earning before.

But with the earnings from the private classes and the 300 euros a month from the government’s furlough scheme, minus the rent she still had to pay in Valencia, she was able to save a good sum in the three months to June last year and afford a new apartment with her boyfriend.

“I had saved 1,200 euros in those 3 months and that allowed me to find a better apartment in the city and to furnish it completely,” Ms. Caballero said.

Goldman Sachs estimates that, as of the first quarter of 2021, household savings in the eurozone and in the U.K. will amount to 19% and 29% of pre-pandemic quarterly GDP, respectively. In Goldman’s baseline scenario, the household savings rate in the eurozone is forecast to fall back to around 13.5% and in the U.K. to 6% in the fourth quarter of this year, as a result of a continued easing in virus-containment measures.

However, spending of accumulated savings and a return in the savings rate to pre-crisis levels are expected to be relatively gradual.

“Given that excess savings have been largely accumulated by higher-income households, which tend to have a lower marginal propensity to spend out of income and wealth, a rapid decline in the stock of accumulated savings is unlikely,” the European Central Bank said in its June macroeconomic projections report.

A still-high number of furlough schemes increases the chances of cautionary savings and therefore lowers the probability of quick spending of excess savings, said Carsten Brzeski, global head of macro at ING.

Write to Maria Martinez at