MONETARY POLICY REPORT | SPRING 2021 (box 3)
(authors: Ondřej Michálek, Eva Slezáková)
The ongoing coronavirus pandemic and the related government measures have been reflected in social and economic life since last spring. Due to shutdowns of retail and services, Czech households had no other option than to curb their consumer appetite in spring 2020. Amid a continued solid labour market situation, these circumstances have led the household saving rate to soar to an unprecedentedly high level (see Chart 1). In this box, we take a closer look at the structure of savings and offer our view of how part of them will be treated through deferred consumption.
Chart 1 – The saving rate will start to fall after the pandemic measures are eased, but it will not have returned to the pre-pandemic level by the end of 2022
saving rate in %
For the purposes of our analysis, we divide savings into current and additional savings. Current savings are savings which households would create over the usual business cycle even if there were no pandemic. We calculate this part of savings as the long-term average savings rate times real gross disposable income (RGDI). We then deduct current savings from total observed savings to obtain the total additional savings households have created due to the pandemic. In the pandemic lockdown period, i.e. in 2020 Q1–2021 Q1, households set aside additional savings totalling around CZK 260 billion at constant prices (see Chart 2).
Chart 2 – Forced savings due to the inability to spend on consumption during shutdowns account for the bulk of additional household savings
household savings in CZK billions; constant prices; seasonally adjusted
We then subdivide additional savings based on households’ motive for creating them, specifically into precautionary and forced savings. Precautionary savings are created by households due to the fear of loss of employment or a drop in income during the pandemic and are largely cyclical in nature. This buffer is therefore very unlikely to be released even after shops and services reopen in the foreseeable future, due to expectations of a further, if only partial, cooling of the labour market. Given the high level of government support provided to economic agents during the pandemic and the low level of interest rates, which is discouraging the creation of additional savings, precautionary savings are, based on our analysis, relatively small. We thus ascribe most of the excess to forced savings created solely as a result of closed shops and services. We estimate them at around CZK 200 billion.
We identified the sizes of the two components of excess savings using a regression model[1] on a sample of data from the pre-pandemic period. The precautionary component is obtained by subtracting current savings from the product of the model-based estimate of the saving rate and observed RGDI. Forced savings are therefore given by difference between observed savings and the sum of current and precautionary savings.
We expect that part of forced savings will be used for deferred (additional) consumption from the middle of this year onwards, especially once shops and services reopen. People will spend mainly on items such as clothing and footwear, household equipment, travel, recreational, cultural, sports and entertainment services and restaurants. Based on the weights of these items in the consumer basket and the amount of forced savings, we estimate that deferred consumption will run to more than CZK 50 billion.
As for the time frame over which deferred consumption will materialise, we expect it to increase gradually until the start of next year and then diminish (see Chart 3). Quarter-on-quarter household consumption growth will be affected by other factors as well. In the second half of 2021, consumption will pick up due to the return of individual sectors to normal, as shown by the contribution of the pandemic. Household consumption without additional measures will simultaneously act in the same direction, reflecting the prospect of an imminent turnaround in the labour market situation. The labour market will start to improve at the start of next year. By contrast, the fiscal impulse will begin to dampen household consumption growth once government support measures are discontinued.
Chart 3 – The effect of deferred consumption will be strong in the second half of this year
household consumption; q-o-q changes in %; contributions in pp; constant prices; seasonally adjusted
Note: The impact of the pandemic represents the effect of shutdowns of the economy and the subsequent return to normal consumer behaviour, in terms, for example, of how often people go to the cinema, restaurants and so on. On top of that factor, there will be the effect of deferred consumption, i.e. people going to the cinema, restaurants and so on temporarily more often than before the pandemic.
[1] The analysis is based on Mody, A., Ohnsorge, F., & Sandri, D. (2012). Precautionary savings in the Great Recession, IMF Economic Review, 60(1): 114–138. The explained variable in the model is the saving rate. The expected unemployment rate, the expected RGDI, the wealth-to-RGDI ratio and the 3M PRIBOR enter the model as explanatory variables.