Australia and UK to benefit the most from spending of excess savings in 2021

Australia and UK are considered among the most likely economies in developed markets to experience the highest contributions to GDP from spending of excess savings in 2021, Fitch Solutions says.

While the volume of accumulated excess savings is in consideration, the speed with which households within these countries can unwind their excess savings will be a major factor for recovery. Meanwhile, Australia and UK are expected to contribute around 2.9 percent and 2.8 percent of excess savings to their GDP.

Furthermore, the research firm indicated that excess savings includes savings that would not have been accumulated had the pandemic not happened. Thus, estimations for excess savings by the firm involves the difference between quarterly household savings in 2020 and average savings from 2018-2019.

The Covid-19 pandemic led to an unprecedented rise in personal savings across developed economies. Fears of high uncertainties surrounding the future of employment among consumers warranted increased savings.

Aside consumers’ decision to save to meet unforeseen circumstances, the imposition of lockdowns to curb the virus spread as well as government transfers led to increased savings among households.

According to Fitch Solutions, overall, developed markets accumulated excess savings of about US$4.3 trillion, representing 8.9% of 2021 projected GDP. Among the nine major developed economies, Germany and the US are likely to see the least contribution of excess savings to GDP.

Available data indicate that on a country-specific level, the US and Eurozone have the largest accumulated excess savings at around US$1.6 trillion and US$1.2 trillion respectively. More to the point, Switzerland and Belgium lead their peers in the region in this regard, with excess savings as a percentage of GDP at 25.4% and 20.2% respectively.

Factors that underpin contributions of excess savings to GDP

Moreover, estimations by Fitch Solutions indicate that, if there be a case where households are able to fully spend their excess savings in 2021, it could contribute up to 8.2 percentage points to developed markets’ real GDP growth. However, households being rational are unlikely to rundown all their excess savings in 2021.

Due to the lingering uncertainties about future employments, as well as other social and psychological factors, consumers are unlikely to fully unwind their excess savings in 2021, Fitch Solutions indicated.

Fitch Solutions believes that the share of excess savings that could be run-down this year ranges between 25% and 50%. This means that excess savings will add between 2.1 pps and 4.0 pps to the growth of developed markets.

Also, the gradual easing of restrictions and lockdowns among countries in developed markets from Q2 of 2021 will also affect the speed with which excess savings are spent, Fitch Solutions indicates.

With some countries in the region still experiencing restrictions, Fitch Solutions asserts that the tighter the restrictions, the higher the likelihood of increasing the potential to spend through decreasing excess savings as restrictions are eased.

Thus, the research firm expects an increased likelihood of household spending in countries where restrictions are tighter than average including Greece, Ireland, Italy, France and UK.