The European Central Bank published research in its Economic Bulletin analysing why the euro area household saving rate has risen again since mid-2022 after returning to its pre-pandemic average, and what this implies for near-term private consumption. The analysis links the higher saving rate to strong real income growth alongside cautious spending, supported by incentives to rebuild real wealth and by the effects of higher real interest rates. Real household income increased by 3.8% over the last two years, reflecting strong labour and non-labour income growth, with non-labour income seen as particularly supportive of saving. Fiscal measures since the third quarter of 2022 to mitigate the energy price shock, including substantial non-targeted income support, also contributed to real income growth. Despite higher incomes, consumption remained sluggish following the inflation surge and monetary policy tightening, with goods consumption falling below its pre-pandemic level in early 2023 and largely stagnating since, while services consumption continued to rise more moderately. In real terms, household net wealth declined from 2022 and returned to its pre-pandemic level during 2023, which likely increased incentives to save. A model-based decomposition attributes the rise in the saving rate between the second quarter of 2022 and the second quarter of 2024 mainly to income effects, with wealth and interest rate effects also important, while precautionary motives were strongest in 2022 as consumer confidence fell and then diminished as confidence recovered. Looking ahead, the saving rate is expected to remain elevated in the near term but ease from its peak as interest rates moderate, with a further decline over time expected to support consumption momentum alongside continued strong real labour income growth.
European Central Bank 2025-01-08
European Central Bank research attributes the renewed rise in the euro area household saving rate to income growth, high real rates and wealth rebuilding
The European Central Bank's Economic Bulletin notes the euro area household saving rate has risen since mid-2022 due to strong real income growth and cautious spending amid higher real interest rates. Despite increased incomes, consumption remains sluggish, with goods consumption below pre-pandemic levels and services consumption rising moderately. The saving rate is expected to stay elevated in the near term but may ease as interest rates moderate, potentially supporting future consumption momentum.