What explains the high household saving rate in the euro area?

Prepared by Alina Bobasu, Johannes Gareis and Grigor Stoevsky

Published as part of the ECB Economic Bulletin, Issue 8/2024.

Following a pandemic-related surge in 2020, the household saving rate in the euro area fell back to its pre-pandemic average by mid-2022 but has since risen again noticeably. The seasonally adjusted euro area household saving rate, as reported by Eurostat in the quarterly sector accounts, rose sharply after the outbreak of the COVID-19 pandemic.^[1] This was mainly due to the lockdowns imposed to contain the spread of the virus, which dampened consumption, while government measures helped to support disposable incomes.^[2] With the restrictions largely lifted by 2022, the saving rate returned to its pre-pandemic average (Chart A). It has, however, increased again over the last two years, while consumer spending has remained sluggish. This box analyses the main economic factors behind this recent rise in the saving rate and explores the near-term implications for private consumption.

Chart A

Household saving rate

(percentage of gross disposable income)

Strong income growth has contributed to the recent increase in the household saving rate. Real household income has increased by 3.8% over the last two years, thanks to strong growth in both labour and non-labour components (Chart B). The increase in non-labour income, which includes income from self-employment, net interest income, dividends and rents, is particularly favourable for savings.^[3] This reflects the fact that non-labour income mainly accrues to richer households, who generally save more than poorer households.^[4] In addition, fiscal policy has also supported real income growth since the third quarter of 2022. This can be largely attributed to the discretionary measures to mitigate the impact of the energy price shock, including substantial non-targeted income support. Since richer households have also benefited from the measures and consume a smaller share of their income, this may also have contributed to a higher saving rate.^[5]

Chart B

Developments in real household income

(percentage changes since the second quarter of 2022 and percentage point contributions)

Although their income has risen strongly over the last two years, households have remained cautious about their spending. Following a post-pandemic rebound, real private consumption growth weakened markedly in the context of surging inflation and the subsequent tightening of monetary policy. The rise in inflation was driven in large part by a strong increase in energy and food prices, which led to a relatively sharp decline in the consumption of these goods.^[6] The subsequent increases in interest rates encouraged saving and likely dampened the consumption of goods more than the consumption of services. The consumption of durable goods was particularly affected, as it is more sensitive to interest rates than services are.^[7] Overall, consumption of goods fell back below its pre-pandemic level at the beginning of 2023 and has largely stagnated in the last two years. At the same time, consumption of services has continued to rise, but at a more moderate pace (Chart C).

Chart C

Real household consumption of goods and services

(Q4 2019 = 100)

With the surge in inflation, households’ real net wealth declined in the past two years, increasing the incentives for them to rebuild their wealth. The net wealth of households, which includes real estate assets, deposits, bonds and shares, minus debt liabilities, rose significantly in the wake of the pandemic, supported by the accumulation of pandemic-related savings. It continued to increase after the pandemic in nominal terms, albeit at a more moderate pace (Chart D).^[8] In real terms, however, household net wealth began to decline in 2022 and fell back to its pre-pandemic level in the course of 2023. This decline has likely contributed to the recent increase in the household saving rate, as households have been incentivised to rebuild their real net wealth.^[9]

Chart D

Household net wealth

(Q4 2019 = 100)

A time-series model for household consumption using standard macroeconomic determinants helps to shed more light on the economic factors behind the recent increase in the saving rate. A reduced-form error correction model combines both long-term and short-term dynamics to explain quarterly consumption growth.^[10] The level of real household consumption is driven in the long term by the level of real household income, the real net wealth of households and real interest rates. In the short term, other cyclical factors, such as consumer confidence which reflects precautionary saving motives, also play a role in explaining consumption dynamics. The model decomposes the change in the household saving rate into four factors – income, wealth, interest rates and consumer confidence – taking growth in real household income as given.^[11]

Empirical evidence suggests that rising real incomes and high real interest rates, together with negative real wealth effects, have pushed up household savings over the past two years. According to the model results, the increase in the household saving rate between the second quarter of 2022 and the second quarter of 2024 can be largely attributed to income effects, as households’ consumption did not adjust immediately to the strong rise in real incomes. Interest rate effects and wealth effects played an important role as well (Chart E). At the same time, precautionary motives also had a positive impact on savings − particularly in 2022 following the Russian invasion of Ukraine, which led to a fall in consumer confidence. However, the importance of such motives seems to have decreased, as consumer confidence has gradually recovered from its slump in the second half of 2022.^[12] Finally, the change in the saving rate over the past two years cannot be fully explained by the factors outlined above. This is highlighted by the unexplained part in the decomposition, which points to unmodeled factors that together have weighed on the increase in the saving rate since mid-2022. However, this cumulative perspective masks the fact that the increase in savings over the last three quarters was larger than previously anticipated and suggested by the model. This most likely reflects stronger consumption inertia and a more gradual adjustment of households’ spending to their increasing purchasing power and diminishing negative shocks than implied by historical regularities.^[13]

Chart E

Contributions to the change in the household saving rate: a model-based decomposition

(percentage point changes since the second quarter of 2022 and percentage point contributions)

Looking ahead, the household saving rate is likely to remain elevated in the near term but should decline below its current level further out. With the key factors – rising real incomes, elevated real interest rates and incentives to rebuild real wealth – likely to persist for some time, the saving rate is expected to remain high in the near term, albeit somewhat lower than its most recent peak, partly reflecting the moderating interest rates. The likely downtick in the saving rate together with continued strong growth in real labour income are expected to help the momentum of private consumption.