In an interview with ausbiz today, Paul Ashworth, our Chief Investment Officer, shared his thoughts about the monumental build-up of $4.5 trillion excess savings in developed economies. Much has been made of policy stimulation of households through grants, tax relief and record low interest rates - the goal being this will or should stimulate consumption and with it, economic growth. We question the assumptions underpinning this policy objective and reassess the question: will the vast household savings hoard get deployed so as to stimulate economic growth, employment and wages growth? There is a strong case that it won't, but it will go somewhere...

In the Federal Budget week, much was being made of the huge scale of the stimulus. A primary element of stimulus has been grants to taxpayers, particularly in Australia, the US and UK. The net result is that households exited the 2020 COVID recession in an improved saving position, manifesting itself in $3.4 trillion of excess savings. This is likely to grow a further $1.1 trillion by the end of 2021. That’s a pool of excess savings of $4.5 trillion or 10% of world GDP.

The policy objective (or hope) is that a large portion of this build-up in savings is committed to private domestic demand and the flow-on stimulatory effects that result. We have a somewhat jaundiced view on whether this policy can achieve this objective, with the resultant effect that economic growth, employment growth and wages growth in 2022 and beyond, may well significantly undershoot.
The extent of excess savings is almost evenly split between households bunkering down due to COVID lockdowns and extreme caution, and government direct contribution to households through grants and tax relief.
Whilst the extreme saving levels have lowered from the onset of COVID in early 2020, they remain at elevated levels compared with pre COVID. We can see this in the chart below. To date, these savings have found their way into debt reduction (which has improved household balance sheets), a small amount into equities and mutual funds, but overwhelmingly, the vast majority is being accumulated in cash and deposits.

As already mentioned, policymakers would like to see these savings activated into consumption. However, given the distribution of these excess savings in the hands of higher income groups, the propensity to consume is lower. This leads us to think that the bulk of these excess savings may not be consumed, but rather continue to be saved and eventually invested. In due course, as the COVID environment continues to settle in developed market economies, these savings will likely flow to financial investments (market risk assets, principally equities) and non-financial investment (residential property acquisition, renovation and improvements). The positive for this is clearly to market risk assets (equities) and the property market. The negative is a big one. That is, consumption demand is not stimulated with the full force of the excess savings and this will result in anaemic economic growth and employment implications.

For different reasons from the past, the result from 2022 and beyond may well be same – weak growth, high levels of underemployment, low investment and healthy returns to equities (in so far as inflation expectations stabilise and revert to levels over the last 20 years).

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.

For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.