European consumers have shown a notable tendency to save a significant portion of their increasing real incomes, maintaining a high savings ratio that has now reached around 15%, compared to 12.5% before the pandemic. This frugality persists, particularly in countries like the UK, where the savings rate has nearly doubled. Although savings levels in Spain and the Netherlands have started to decline, they remain elevated. This contrasts sharply with consumer behaviour in the US, where spending has been more pronounced.
Photo: Dreamstime.
Despite the trend, real incomes are expected to continue improving next year, albeit at a slower rate. Wage growth is decelerating, inflation is easing more gradually, and government fiscal measures are affecting household finances. Additionally, slower employment growth is projected to dampen income gains, and increased unemployment fears, especially as the manufacturing sector undergoes restructuring, could further undermine consumer confidence. High interest rates continue to incentivise saving over spending, tempering any rapid decline in the savings ratio.
The housing market is playing a significant role in this dynamic. Unlike the US, European households have not substantially increased their bank deposits, limiting the potential for a spending surge. However, the high savings rate has contributed to gradual mortgage debt reduction, as lower house prices and high mortgage rates have encouraged down payments and slowed housing transactions. In 2025, with lower mortgage rates and rising nominal incomes, house prices are expected to increase, sparking more housing transactions. This shift is likely to boost household consumption, as moving often involves purchasing new items for the home.
A potential economic upswing could follow as higher-income households, which have been the main drivers of savings, begin to spend more. Historical patterns indicate that sudden jumps in real income are typically not immediately spent, but over time, consumer behaviour adjusts. If higher-income households choose to increase their spending, this could have a significant positive impact on overall consumption. An additional factor could be an unexpected surge in housing market activity, which would amplify the effect on spending.
A return of the savings rate to pre-pandemic levels could lift GDP by as much as 1.5%. While the economic outlook remains uncertain, there is potential for a positive surprise as European households move from cautious saving to increased spending in 2025.
Source: think.ing.com