Pent-up demand during the health crisis and the outlook for consumption

One of the most striking aspects of the current crisis resulting from the COVID-19 pandemic has been the extraordinary upturn in the savings rate of Spanish households, reaching an all-time high in 2020 (14.8% of gross disposable income). In previous crises, the bulk of the increase in household savings was for precautionary reasons, a consequence of the high uncertainty that usually accompanies a recessionary period and a perceived deterioration in the future financial situation.

However, the particular features of this health crisis have forced households to accumulate savings in addition to saving as a precautionary measure. The reason is that families whose income has remained similar to its pre-pandemic level have found it impossible to maintain their usual level of consumption, especially regarding certain goods or services. According to data from the Bank of Spain’s Survey of Business Activity (EBAE), the restrictions imposed to contain the spread of COVID-19 have meant that retail sales fell by 16% in 2020, hospitality sales by 46% and leisure and cultural activities by around 26%. These falls in consumption reveal a large pent-up demand,⁸ which seems to be the result of the involuntary savings accumulated by households. Quantifying this pent-up demand via the observed increase in savings and analysing the role this will play after the mobility restrictions are lifted will be key to gauging the trend in consumption per se in 2021.

According to a study by the Bank of Spain, households accumulated about 65 billion euros more in savings than in 2019, equivalent to 5.3% of GDP in 2019. As can be seen in the chart below, it is estimated that only 0.7 points of this accumulation of savings were the result of precautionary savings due to uncertainty and the expectation of an economic crisis. On the other hand, the contribution of involuntary savings was much higher, estimated at around 3.5 points of GDP. In other words, 66% of the savings were accumulated by force. This large accumulation of involuntary savings indicates, in turn, the existence of a large pent-up demand.

Factors contributing to the increase in savings in 2020

% of GDP in 2019

Moreover, according to data available from the Bank of Spain, most of this increase in household savings is in the form of cash and deposits. While the relative weight of shares and investment funds increased last year, rising from 5% of the total net acquisition of financial assets in 2019 to 22% in 2020, cash and deposits continued to be the most popular financial savings instrument (94% of the total). These figures suggest that much of the savings accumulated by households in 2020 remains in highly liquid assets. Consequently, there is greater potential for households to lower their savings rate once the mobility restrictions are lifted.⁹

Savings instruments: net acquisition of financial assets by households

Billion euros

In this respect, once the health crisis is resolved, with the expected vaccination and immunisation of most of the population by the summer, along with a recovery in international tourist arrivals (according to our forecasts, tourism will pick up to 55% of its 2019 level), much of the savings accumulated in the past year and a half of the pandemic should serve as a stimulus for the economy as a whole in the coming quarters. The upturn will also be stronger as both the labour market and household disposable income begin to recover.

However, it is important to note that not all the savings accumulated due to the restrictions will directly lead to increased consumption once the restrictions are lifted. We expect the household savings rate to remain relatively high during 2021 as uncertainty and social distancing, albeit much more moderate than at present, continue to play their part. Moreover, it should be noted that a large proportion of the accumulated savings is concentrated among the higher income households that have been less affected by the current crisis,¹⁰ and it is precisely these income brackets that have a lower propensity to consume; i.e. when the restrictions are lifted and we begin to recover our pre-pandemic consumption habits, the households with greater purchasing power could be the ones that increase their level of consumption the least, in spite of having accumulated the most savings. On the other hand, it should also be remembered that a significant part of these savings come from the fact that a variety of services that cannot be postponed temporarily, such as tourism and leisure activities, have stopped being consumed, so these may not have generated a large pent-up demand.

To gauge how quickly and how far consumption will recover, we have analysed the sensitivity of consumption and the savings rate to uncertainty and mobility restrictions, enabling us to produce different scenarios. Specifically, we have drawn up a central scenario for consumption, in line with CaixaBank Research’s central forecast scenario which assumes a gradual lifting of restrictions from May onwards; an optimistic scenario, in which we assume that restrictions will be lifted faster and almost entirely gone by the beginning of Q3; and a pessimistic scenario, in which we assume the level of restrictions in Q1 is maintained throughout 2021. As we can see in the chart below, these different assumptions regarding the lifting of restrictions have a considerable effect on the consumption forecasts.

According to the results obtained for the central scenario, the household savings rate would moderate to 12.6% in 2021 (14.8% in 2020), resulting in 6.6% growth in consumption over the year as a whole. As can be seen, this is a relatively conservative scenario given the small moderation in the savings rate predicted (in 2019 , the savings rate was 6.3%). However, due to the great uncertainty that still exists regarding restrictions in the short term, we believe this is the most likely scenario. In the optimistic scenario, which we believe is not very likely, the savings rate would fall to 10.9% and consumption would grow by 8.7%. Finally, the pessimistic scenario, in which restrictions are maintained for longer (of residual probability), the savings rate would barely decrease (13.8%) and consumption would grow significantly less (5.2%). The large differences between the optimistic and pessimistic scenarios show how important it is for restrictions to be eased in order to contain involuntary household savings and encourage consumption.

In conclusion, household consumption forecasts for 2021 are very positive. Among other factors, this is thanks to the lifting of retail restrictions as a result of the population becoming vaccinated, the recovery in domestic and international tourism, and also the role played by pent-up demand. In this respect, retail will be one of the sectors benefitting most directly from the recovery in consumption. Nevertheless, the relatively strong performance of retail sales observed in 2020 indicates that levels of pent-up demand in the sector are somewhat lower than for other goods and services less consumed during the pandemic. In any case, 2021 looks set to be a year of strong recovery in consumption and this is good news for the sector, which will see the improvement in its activity accelerate strongly during the second half of the year.