• The notion of Pandemic ‘excess savings’ is becoming less useful over time. While it was a way of illustrating the highly unusual nature of the recession experienced in the pandemic, at this stage the focus should be on aggregate wealth and income to explain household consumption and savings decisions.
• It is true that during the pandemic, when restrictions were in place, economic fundamentals could not explain a lot of the movement in savings. However, ‘excess savings’ are not observable and different estimation approaches produce very different results.
• Excess savings are not a separate pot of gold waiting for households to dip into, but rather are one small part of the overall change in household balance sheets that has occurred. In fact, our estimate of cumulative excess savings equates to only around 4% of the increase in household net wealth in Australia since end 2019.
• Aggregate household wealth has increased in most countries, from its pre-pandemic level, so the concept of savings being ‘run down’ is not a useful characterisation of recent events.
• Negative real income shocks tend to depress the savings rate. This is what we have been seeing in Australia and Japan, and for a period the US and UK. Wealth gains also depress the savings rate – Australia has seen a large increase in wealth from its pre-pandemic level relative to other countries.
• Only in the US is the savings rate somewhat lower than might have been expected based on changes in income and wealth since the end of 2019. For Australia, the Euro-zone and Canada, it is higher. It is hard to see any special, significant, impact from ‘excess savings’.
• Over the last year or so, changes in savings behaviour can largely be explained by changes in income and wealth, although other factors such as elevated interest rates may have played a role. This also implies that income and wealth will likely be the key drivers of consumption going forward. The lift in Australian household incomes expected in the second half of this year, in part due to tax cuts, likely means both the savings rate and consumption growth will strengthen.

For further details please see Macro thematic – time to retire ‘excess savings’ & focus on fundamentals (June 2024)