Consumption and pent-up demand: profiling the recovery’s star consumer
The restrictions put in place to curb the spread of the coronavirus and caution due to the prevailing uncertainty led to a large increase in savings by Spanish households in 2020. Specifically, we estimate that cumulative savings from the pandemic reached €46.6 billion, 3.7% of 2019’s GDP. This sharp increase in savings has diminished as we have been able to return to our old habits, leading to a rapid recovery in consumption; a trend that will most likely continue in the coming quarters.
The restrictions put in place to curb the spread of the coronavirus and caution due to the prevailing uncertainty led to a large increase in savings by Spanish households in 2020. Specifically, we estimate that cumulative savings from the pandemic10 reached €46.6 billion, 3.7% of 2019’s GDP. This sharp increase in savings has diminished as we have been able to return to our old habits, leading to a rapid recovery in consumption; a trend that will most likely continue in the coming quarters.11
How was this increase in savings distributed across different population groups? Using information from more than 10 million CaixaBank clients, duly anonymised, we reconstructed the real-time trend in household gross disposable income (GDI) and consumption by both income group and age.12
As expected, the increase in savings was especially pronounced among those with higher incomes: high and medium-high income groups accounted for almost two-thirds of the additional savings generated in 2020 as a result of the pandemic, as can be seen in the chart below.
- 10. We define «excess savings» or «pent-up savings» as the difference between the savings occurring in 2020 and the savings that would have occurred if households had maintained their 2019 saving rate with their observed gross disposable income for 2020. We subtracted the part used to pay off debt from this amount.
- 11. Specifically, in 2020 and according to data from the Bank of Spain, most savings were used to purchase financial assets (65%, with a very high share of deposits), while the proportions allocated to investment were relatively smaller, mainly housing (30%) and debt reduction (5%).
- 12. We have taken the main sources of income into account in order to calculate the GDI: salary, unemployment benefit, state pension, state aid and income from private pension plans. We have subtracted any debt repayments. In terms of consumption, we have examined card transactions and cash withdrawals from ATMs and have also included direct debits and consumer transfers.
The results seem self-explanatory: restrictions were imposed on the whole population and entailed an involuntary reduction in consumption, especially for services and durable goods, which resulted in those people with higher incomes to save a larger proportion of their income.
When we break down the excess savings by age, we can see that seniors (aged 60 plus) accounted for just over half the savings generated at an aggregate level; adults (aged 30-59) one third, and young people (16-29) a small proportion (see the chart below). Again, the result seems plausible: older people were subject to the same restrictions as the other demographic groups but the impact on their purchasing power was lower.
The pent-up demand resulting from the toughest months of the pandemic is driving strong growth in consumption across all population groups, from the lowest to the highest income groups. In fact, this has already taken consumption to above its pre-pandemic levels in 2021, both at an aggregate level and across all income groups.13 This huge drive from demand, which can be observed across all the major developed countries, helps to explain the logistical difficulties occurring at a global level in satisfying such a rapid recovery in demand.
- 13. It is worth noting the substantial difference between the consumption carried out with card payments, cash withdrawals, e-commerce payments and direct debits, observed via CaixaBank’s internal data, and the national accounting data published by the National Statistics Institute in which, according to their estimates, the recovery in household consumption is more modest.
In any case, there are some notable differences between the different groups. Among low-income people, the rebound in consumption is more vigorous compared to the pre-pandemic period while the consumption growth rate is lower among those with higher incomes.14 Nevertheless, it should be noted that, given that people with higher incomes tend to have a greater volume of consumption, although the growth rate is lower their contribution to the aggregate growth in consumption is still significant. Specifically, for 2021 we estimate that the 20% of households with the lowest incomes have contributed around 10% to Spain’s aggregate consumption while the 20% of the population with the highest incomes have accounted for more than 30% of the total.
In terms of the demographic profile, the strong growth in consumption among young people is notable. For seniors our projections show strong growth in spending in 2021 compared with 2019, driven largely by the aggregate increase in savings in this group. On the other hand, consumption by adults is recovering more moderately compared with the other age groups. The fact that the economic uncertainty associated with COVID-19 has not completely dissipated and that other sources of risk have emerged, such as supply shortages and rising energy prices, could explain the slower revival in consumption among this demographic group, which tends to accumulate a higher level of debt and is perhaps moderating its consumption for precautionary reasons.
- 14. It is common for people with higher incomes to have a lower marginal propensity to consume. See, for example, Laborda, J. L, Marín-González, C. and Onrubia-Fernández, J. (2018). «¿Qué ha sucedido con el consumo y el ahorro en España durante la Gran Recesión?: Un análisis por tipos de hogar». Estadística Española, 60(197), 273-311.
In short, the recovery in consumption in 2021 has been a palpable reality reaching a broad, heterogeneous set of households, particularly among young people and low-income groups. Looking ahead to 2022, the large amount of savings accumulated at an aggregate level during the pandemic suggests the recovery in consumption still has a long way to go, especially among high-income groups, provided the logistical problems in global value chains are resolved and inflation normalizes.