Euro zone households likely to keep saving to rebuild wealth, ECB says

FRANKFURT: So, the European Central Bank (ECB) is saying that households in the Euro zone are likely to keep saving a big chunk of their income. This is mainly to recover from the wealth they lost due to high inflation. It looks like this trend of saving will keep consumption low, which isn’t great for the economy right now.

Families across Europe are sitting on a mountain of savings. This is surprising because many hoped that people would start spending more and help boost the economy. But the ECB thinks that the saving rate will stay high for a while, even if it drops a bit from its recent peak. They mentioned that moderating interest rates play a part in this.

In the second quarter of last year, Euro zone households saved about 15.7% of their disposable income. That’s a lot more than the 12% to 13% range we saw before the pandemic. This high saving rate has been holding back consumption and keeping economic growth pretty stagnant for over a year now, despite the ECB’s hopes for a recovery driven by spending.

The inflation surge from 2021 to 2022 really hit households hard, reducing their real wealth. The ECB pointed out that this has made people more eager to save and rebuild what they lost. Plus, with real incomes bouncing back and high real interest rates, savings are getting a boost.

Still, the ECB believes that spending will eventually pick up. They think that as the saving rate dips and real labor income continues to grow, private consumption will gain some momentum. So, there’s a bit of hope on the horizon!