Analysis-Dwindling excess savings could scupper markets' soft-landing hopes
By Naomi Rovnick and Dhara Ranasinghe
LONDON (Reuters) — Markets have high hopes for a soft landing for the economy, with bonds and equities rallying. Yet a sharp drawdown in the excess savings created by COVID-19 could be a curve ball that slams into bullish sentiment.
The cash piles households built up during the lockdowns and government stimulus of 2020-2021 have long been touted by analysts and central bankers as a reason economies could avoid a deep recession.
But sky-high inflation and rapidly rising interest rates in response are shrinking this savings cushion fast.
U.S. excess savings have fallen to around $500 billion from around $2.1 trillion in August 2021, the San Francisco Federal Reserve estimates.
In Europe, Deutsche Bank (ETR:DBKGn) reckons excess savings in Sweden, struggling to contain a property slump, have dwindled. British households withdrew money from outright savings at a record pace in May, while the government's Office for Budget Responsibility forecasts a savings ratio of zero by year-end from almost 25% in 2020.
The end of savings won't cause a recession with jobs markets tight. Still, a spending downturn may hasten a typical economic pain spiral of falling business investment then high unemployment.
Government bonds will shine in a recession, investors said, while dwindling savings make consumer stocks and high-yield credit assets to avoid.
«Domestic consumption is a huge part of the economies,» in Britain, the United States and the euro zone, said Janus Henderson multi-asset portfolio manager Oliver Blackbourn.
«As soon as that starts to fall apart these economies can become very, very fragile very quickly.»
RUNNING OUT
Definitions for excess savings differ, but economists generally
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