UBS estimates that, if you include businesses, there is likely $ 300 billion in excess savings caused by COVID-19.
Will this precautionary behavior continue? Probably not, think most economists.
The consensus is that households, many of whom have endured months of lockdown, will want to start spending again.
Holidays at the top of wish lists
UBS recently conducted a consumer survey which found, unsurprisingly, that restaurants and transportation were two areas where consumers expect to spend significantly more once lockdown restrictions are lifted. Taking vacations was high on wish lists, with the survey suggesting that many people were planning to dip into their savings to fund trips abroad.
Citi said in a recent research note that it believes consumers will drive the economic recovery in 2022, aided by the build-up of household savings and fiscal stimulus.
With rising house prices also increasing homeowners’ paper wealth, he predicted a spending spree that would lower unemployment to less than 4% over the next two years.
Once unemployment begins to rise to these levels, economists believe it will likely lead to wage inflation, which could be a trigger for the RBA to start raising official interest rates.
The other interesting fact about the huge amount of household savings is that some argue that it was financed by the modern equivalent of printing money, known as “quantitative easing” in economic jargon.
ABC’s Aird explains that one of the main reasons household deposits have risen so much is due to large support payments from the government aimed at protecting the economy from the pandemic.
The government did not print this money – it was borrowed from the financial markets.
“Unknown territory” for Australia
The RBA spent billions of dollars a week buying second-hand government bonds from banks, indirectly funding government borrowing.
Aird calls it “uncharted territory” for Australia. “Government transfer payments were indirectly funded by the central bank through money creation,” Aird said.
He argues that this act of money creation would ultimately contribute to higher inflation, as some of that government-funded savings would find its way back into the economy through increased household spending.
Aird argues that consumers who used the COVID-19 period to pay off debts or accumulate savings would be more likely to spend a higher share of their future income. Spending 15% of the accumulated savings would inject more than $ 35 billion into the household budget in 2022, he says.
Predicting how households will decide to save or spend their money involves a bit of guesswork, especially when the pandemic has added so much uncertainty to the outlook.
However, there seems to be general agreement that spending madness is the order of the day next year, as households begin to dip into their war savings coffers.