The epidemic has caused a sudden increase in unemployment rates worldwide, which was reflected in a significant decrease in the disposable income of families, the main component of which is the wage bill. As a result, families have responded quickly by cutting back on their consumption levels, in an effort to preserve their savings. But at the same time as their incomes declined, families in developed countries were able to improve their savings rate compared to the pre-epidemic situation. How was this possible?
The explanation is found in the expansionary fiscal policies promoted by different governments which, through various support measures, have been able to push household income towards a higher path than that observed in the pre-pandemic economy. To illustrate this phenomenon, it is important to understand that an increase in income can have two possible directions: an increase in consumption or an increase in saving. In this way, if income remains stagnant, the decrease in consumption will be reflected in an automatic increase in savings. For this reason, the aim of fiscal policies has been to increase the disposable income of households, to avoid a further contraction in consumption levels, and in this way to set a floor on the aggregate demand of the economy.
The graph shows the behavior of these variables for the United States, the Eurozone, Japan, the United Kingdom, and Canada. The triangles represent the percentage change in personal disposable income between the first three quarters of 2020 compared to the same period of the previous year. The columns show how changes in income are reflected in changes in consumption (yellow) and savings (blue). From his analysis, it can be seen that consumption has decreased in all countries, although there are important differences. While in the US the contraction was about 3% compared to pre-pandemic levels, the decline in the UK was about 12%. Meanwhile, saving levels rose in all developed countries, from 7% in the euro area to 16.5% in Canada.
In both the Eurozone and the UK, the increase in savings is explained almost entirely by shrinking consumption, as incomes have remained stable. On the other hand, in the United States and Canada, income has increased dramatically, so that savings have multiplied the decline in consumption.
These large levels of savings accumulated during the pandemic make the strength of the economic recovery largely dependent on the tendency of households to spend their surpluses, which will depend on how quickly confidence is restored.
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