One of the main engines of the Spanish economy's recovery is household consumption. According to the latest data available, corresponding to 2015 Q2, growth in private consumption in nominal terms speeded up to 1.8% year-on-year (cumulative over 4 quarters).1,2 This increase is being supported by the upswing in nominal gross disposable income (1.9% year-on-year), allowing the household savings rate to remain almost stable at around 9.5%, a figure only slightly below the historical average of 9.7%. Given that the economy is now entering a phase of more moderate rates of growth and job creation, this Focus analyses the role that might be played by the dynamics in consumption and savings to cushion this slowdown.
One fundamental decision taken by households is how much of their disposable income should be consumed and how much should be saved. A balanced consumption pattern is one that is based on growth in disposable income in the medium term, but consumption and income may diverge over the short term. Households might reduce their consumption (and increase their savings) under more uncertain economic conditions, as occurred in Spain in 2009 when the household savings rate exceeded 13.0%. As a result of this increase in precautionary savings, Spanish households accumulated liquid financial assets (deposits and cash) totalling around 50 billion euros (see the Focus «The financial wealth of households: a buffer for consumption» in MR12/2014). On other occasions, when the economic climate is more favourable and looks like improving, households may decide to temporarily increase their consumption (and reduce their savings) above their income level with the aim of smoothing consumption over time. Below we argue that this second situation may occur over the next few quarters.
The survey carried out every month by the European Commission to draw up the consumer confidence index asks households about their intention to spend on durables over the next 12 months. As can be seen in the graph, the highest income households are the ones which, since last year, have had greater expectations of buying this kind of product. These households are possibly the ones that have led the recovery in consumption, making purchases that had been postponed during the recession due to the high degree of uncertainty.
However, it is in medium and low-income households where the biggest change in intention to buy can be found: while they were not very willing to make large purchases one year ago, they now expect to do so over the next 12 months. When these lower income households start to consume, the savings rate is likely to fall to some extent over a few quarters: according to our forecasts, it will follow a slightly downward trend next year as we predict an increase in nominal consumption (of 3.5%) that is a little higher than the increase in gross disposable income (of 3.2%). Consequently, although consumption will continue to be supported by growth in income (thanks especially to job creation and, to a lesser extent, to the positive impact of low interest rates), we expect a slight fall in the savings rate to act as an additional mechanism to boost consumption.
In any case, if the savings rate remained at its current level throughout 2016, consumption would only be 0.3 pps lower than the forecast (3.2% instead of 3.5%). On the other hand, if the savings rate fell by 1 pp more than expected, nominal consumption would rise by an additional 1.1 pps, to 4.6%. In summary, an analysis of the expected trend in consumption and savings next year diminishes concerns regarding the impact on activity of the expected slowdown in the rate of job creation.
1. Year-on-year growth in nominal consumption, non-cumulative over 4 quarters, stood at 2.6% in Q2. In this Focus the data are cumulative over the last 4 quarters because this is the customary way to calculate the savings rate.
2. According to the new GDP series published by the INE on 30 October. The revision of the historical GDP series revealed that consumption was less dynamic than previously estimated. Specifically, in 2014 real consumption grew by 1.2% and nominal by 1.4%, below the estimation of 2.4% in both cases before the revision.