European households are increasingly turning to bank deposits amid subdued consumer spending due to inflation, with Cyprus following a similar pattern as savings increased by €2.85 billion from early 2024 to November, according to latest available data.
A European Central Bank article titled “What explains the high household saving rate in the euro area”, authored by Alina Bobasu, Johannes Gareis and Grigor Stoevsky, examines the reasons behind rising savings during inflationary periods and explores short-term implications for private consumption.
The authors suggest that whilst household saving rates are likely to remain high in the short term, they are expected to decline from current levels.
They conclude that this anticipated decrease, combined with continued robust growth in real labour income, should boost private consumption dynamics.
The analysis reveals that savings growth in the last three quarters of 2024 exceeded previous expectations, which the authors attribute to stronger consumer inertia.
Empirical evidence indicates that rising real incomes and high real interest rates have driven household savings over the past two years.
The authors note that precautionary motives also positively impacted savings, particularly in 2022 following Russia’s invasion of Ukraine, which led to decreased consumer confidence.
Regarding inflation’s role, the analysts explain that the surge was largely driven by sharp increases in energy and food prices, leading to a relatively steep decline in consumption of these goods.
Subsequent interest rate rises encouraged saving and likely reduced goods consumption more than services consumption.
Durable goods consumption was particularly affected, being more sensitive to interest rates than services.
Overall goods consumption fell below pre-pandemic levels in early 2023 and has remained largely stagnant for two years, whilst services consumption continued to grow at a more modest pace.
The report highlights that strong income growth contributed to the recent rise in household saving rates, with real household income increasing by 3.8% over the past two years.
Non-labour income, including self-employment earnings, net interest income, dividends and rents, has been particularly conducive to savings.
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