October 15, 2021

News in Charts: Households hold the key

by Fathom Consulting.

World GDP has surpassed its pre-pandemic level, and Fathom expects output will reach its pre-pandemic trend before the end of the year. Whether this is achieved, will in part be based on how quickly households and non-financial businesses spend savings built up during the pandemic. With elevated inflation, particularly in western advanced economies, a strong recovery through the remainder of the year could push up inflation expectations and put further pressure on central banks to remove some policy accommodation.


During the pandemic, households across the most advanced economies built up huge excess savings. In the US, incomes rose despite widespread unemployment amid high levels of government support to households. Although consumption expenditure fell drastically, it has now returned to its pre-pandemic level, though it is yet to return to the previous trend. Excess savings in the US amount to as much as 10% of GDP, higher than in other developed economies.

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Evidence suggests that the excess savings in developed economies remain largely unspent, despite highly vaccinated countries having entirely removed or significantly reduced domestic COVID-19 restrictions, and retailers being open. Data on retail sales show that US households have largely returned to high street shops, whilst online sales remain elevated in the UK and elsewhere.

In the US and other countries, households have so far used their savings to acquire financial assets, mostly in the form of accessible bank deposits. UK survey evidence from the Bank of England suggests that some households are still holding back on drawing down these deposits due to concerns about the virus. With a low rate of return, holding instant access deposits makes little sense unless households expect to be cash constrained. As these fears subside, some of these deposits could be spent, posing an upside risk to the economic outlook.

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Despite concerns over the Delta variant of the virus, consumer confidence has returned to normal levels in most advanced economies. Mobility data for western developed countries suggest that time spent near retail and recreation is close to normal levels and OpenTable data for those economies suggest that eating out is above 2019 levels.

Fathom places around a 50% weight on the scenario in which the current period of above-target inflation proves to be transitory. If households do increasingly spend their pandemic savings, it will leave central banks facing a dilemma. They could opportunistically shift the inflation target upwards after a period of higher inflation, a move which would be supported by many, including Fathom Consulting. We place a 40% weight on that scenario. Alternatively, central banks could materially tighten policy leading to a sharp slowdown in growth and a big fall in asset prices — a scenario on which we place only a 10% weight.

These scenarios are covered in more detail in Fathom’s latest Global Economic and Markets Outlook. For further information about our services, please contact enquiries@fathom-consulting.com.

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