Focus should now be on aggregate wealth and income to understand household consumption and savings decisions, he suggests
The concept of pandemic “excess savings” is losing relevance, according to NAB senior economist Tony Kelly (pictured).
While it initially used to highlight the recession’s unusual nature during the pandemic, Kelly stressed the focus should now shift to aggregate wealth and income to understand household consumption and savings decisions.
“During the pandemic, when restrictions were in place, economic fundamentals could not explain a lot of the movement in savings,” Kelly said. “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, Kelly said in NAB’s recently released economic report, has grown in most countries from pre-pandemic levels, making the notion of savings “running down” less applicable. Negative real income shocks typically lower the savings rate, as seen in Australia, Japan, the US, and the UK. Wealth gains also reduce the savings rate, with Australia experiencing substantial wealth increases relative to other countries.
Kelly pointed out that in the US, the savings rate is somewhat lower than expected based on income and wealth changes since 2019. In contrast, it is higher in Australia, the Euro-zone, and Canada, showing no 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,” Kelly said. “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.”
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
