Whether to get into debt: a dilemma that hinges on how much was saved during the pandemic

Historically, and in general terms, increases (or decreases) in consumption go hand in hand with larger increases (or decreases) in consumer credit. This relationship is particularly close in the case of durable goods, which are the most frequently financed given that they tend to be larger expenses.

Content available in
Eduard Llorens i Jimeno
Màxim Ventura Bolet
December 17th, 2021
Context: this time is different

Historically, and in general terms, increases (or decreases) in consumption go hand in hand with larger increases (or decreases) in consumer credit. This relationship is particularly close in the case of durable goods, which are the most frequently financed given that they tend to be larger expenses.

Unlike past crises, this time the recovery in consumption will be greater: we expect nominal consumption growth in 2022 to be larger than in the gradual recovery from the previous crisis, continuing the momentum seen in 2021. This faster speed of recovery can be explained by the fact that much of the savings generated in 2020 were forced and are expected to be released relatively quickly, and also because economic support measures have mitigated the impact of the crisis on households. This booming consumer recovery will also drive further growth in consumer credit, although the extent of the rebound will depend on how excess savings are distributed.

Spain: consumption and consumer credit

Last actualization: 17 December 2021 - 12:11
Trend in consumer debt: a disaggregated analysis

During 2020, household consumer debt shrank by 2.6% annually due to the collapse in consumption (down by 12% in 2020) as a result of restrictions on mobility. These exceptional circumstances also had an impact on new consumer credit, which fell by 26.6% year-on-year. The reduction in debt was partly offset by legislative and sector moratoriums for the most vulnerable households.

During 2021, and following the lifting of mobility restrictions, consumption recovered and, with it, new loans, which picked up strongly.15 This moderated the reduction in household debt for consumption purposes.16 When we use internal CaixaBank data to study the trend in debt during 2021 by income level,17 we observe that it increased for the lowest income group, fell significantly for the medium-income group and fell more slightly for high-income earners.

With regard to the medium-income group,18 the result is consistent with a deleveraging process as they were the group that accumulated the largest amount of debt before the pandemic (58% of consumer debt was concentrated in this group). This group also saved considerably during 2020, accounting for almost 60% of the aggregate excess savings in the year, according to estimates based on internal data. Our results suggest that the people in the medium-income group have taken advantage of excess savings not only to consume19 but also to deleverage. In other words, there has been something of a pushback for this group. In contrast, those with lower incomes achieved modest excess savings in 2020 and they are also the ones who have consumed most vigorously in 2021 compared with the pre-pandemic period. It is therefore logical that they should be financing this high consumption, which would explain why their debt has increased since the end of the worst phase of the pandemic. Finally, high-income earners, who accumulated 38% of the excess savings in 2020, have a low consumer debt burden relative to their income, which would explain why they have not devoted these savings to reducing their debt to the same extent as medium-income earners.

  • 15. Cumulatively 7.6% year-on-year in January-September 2021.
  • 16. –0.4% between January and September 2021.
  • 17. Up to September, the latest month for which we have data at the time of publishing this Report.
  • 18. When we talk about medium-income, we mean the sum of medium-low income, medium-income and medium-high income groups.
  • 19. Indeed, there has been a significant rebound in consumption compared with the pre-pandemic period in the medium-income group. This is a larger increase for the second income group (medium-low income) and decreases for the following groups, although it is also higher than the trend in a normal year. See the article «Consumption and pent-up demand: profiling the recovery’s star consumer» in this Consumer Report.

Growth rate of consumer debt by income group

Last actualization: 17 December 2021 - 12:12
Outlook: the importance of estimating pent-up demand accurately

To understand future consumption financing needs we must first understand how much of the pent-up consumption was released in 2021 and how much can be met by savings accumulated during the pandemic.

Using internal data, we have estimated the additional consumption that took place in 2021 compared with the consumption that would have taken place before the pandemic by income group.20 When compared with the excess savings generated in 2020 by income group, the results suggest that, on aggregate, half the excess savings would have been used in 2021. In particular, our results (see the chart below) show that low and medium-low income groups would have consumed all their excess savings from the pandemic in 2021, while medium-income groups would have consumed 60% and the medium-high and high-income groups clearly less than half. These results are in line with the recovery in new loans observed in 2021. Low-income and medium-low income groups do not have enough savings accumulated in 2020 to meet their pent-up demand, so they have resorted to bank financing, in addition to using savings accumulated before the pandemic. In contrast, the rest of the income groups still have a cushion of savings to finance their consumption in 2022 or to increase their long-term savings for future investments or retirement.

  • 20. In other words, we have compared the estimated consumption in 2021 with the consumption that results from maintaining the 2019 marginal propensity to consume with the 2021 gross disposable income, attributing this difference to the pent-up demand accumulated during the pandemic.

Excess savings in 2020 that will be used in 2021 by income group

Last actualization: 17 December 2021 - 12:13

Looking ahead to 2022, consumption growth is expected to be strong and above its historical average. This growth will be supported by favourable financial conditions, by the remaining pent-up demand and the funds from the European recovery plan NGEU. The aim of these European transfers is to encourage sustainable mobility and the renovation of housing to promote energy savings, among other areas, which will boost the consumption of durable goods such as electric cars, recharging points, appliances, air conditioning and more energy efficient heating, etc. Moreover, aid to the private sector does not cover the entire investment, so co-financing will be required.

Much of the consumption in 2022 by low-income and medium-low income groups, especially of durable goods, will rely on bank financing as they will no longer have the savings cushion from 2020. Additionally, for medium-income and medium-high income groups, we estimate that the additional consumption expected in 2022 compared with the average pre-pandemic consumption will be greater than the funds they have left over from their pandemic savings (provided current supply problems do not persist), so they will also require other sources of financing such as bank financing.21 As a result, new consumer credit is expected to grow significantly in 2022.

  • 21. In addition to relying on savings accumulated before the pandemic and reducing their savings rate in 2022.
Eduard Llorens i Jimeno
Màxim Ventura Bolet