EcoFlash

European household account: a turbulent story

ECO FLASH  
N°22-11  
29 June 2022  
EUROPEAN HOUSEHOLD ACCOUNT: A TURBULENT STORY  
Jean-Luc Proutat  
HOUSEHOLD SAVINGS RATE IN THE EUROZONE  
Once protected by the logic of “whatever  
the cost”, household purchasing power  
in Europe is now threatened by inflation.  
Actual  
annual average  
2
6
4
2
After the pandemic, public policies  
are being solicited once again to help  
reduce the loss of purchasing power,  
albeit without really succeeding. In 2022,  
the real disposable income of Eurozone  
households is expected to decline by  
about 2.5%.  
22  
20  
18  
16  
14  
12  
10  
2016  
2017  
2018  
2019  
2020  
2021  
2022  
Consumption is still rising, but only  
because the household savings rate is  
declining, a trend that masks extremely  
diverse situations.  
SOURCE : EUROSTAT / BNPPARIBAS FORECASTS  
CHART 1  
In 2020, household purchasing power (i.e. real disposable income) in the Eurozone was preser-  
ved, even though economic activity had collapsed, halted by the Covid-19 pandemic. Exempt  
from bankruptcies and unemployment, the worst recession to date (Eurozone average GDP de-  
clined 6.5% in volume) was also the most unusual one.  
ACTIVITY PLUNGES IN 2020, BUT REVENUES HOLD UP  
The household accounts published by the European Central Bank (ECB) reveal the manner in  
which “whatever the cost” helped absorb the shock. Foremost, governments sought to pre-  
serve employment and revenues by financing job retention schemes. In some countries, such as  
Germany and Spain, the loss of activity was offset by benefits paid directly to workers, the net  
amount of which nearly tripled at the Eurozone level in 2020. In other countries like France, Italy  
and the Netherlands, companies were given subsidies in order to maintain wages. Indirectly,  
state-backed loans played the same role. By receiving emergency funds or through the deferred  
payment of charges (fees, rent, etc.), self-employed workers were also able to limit their ope-  
rating losses. In the end, after taking into account tax cuts, disposable household income was  
preserved in nominal terms, and only declined marginally in real terms (see Table 1).  
In a space where social transfers account for a quarter of GDP, making automatic stabilisers very  
powerful, it is not all that exceptional that households should be buffered against the collapse  
of economic activity. During the Great Recession of 2009, household purchasing power did not  
decline much, notably because Germany was pioneering its effort to systematize the use of  
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job retention schemes (“Kurzarbeit”). What was new this time was the  
unprecedented amount of public resources that were called into play. In  
the Eurozone, direct transfers to households and companies amounted  
to about EUR 1,400 billion, or 12 points of annual GDP, according to  
EUROZONE HOUSEHOLD ACCOUNT  
EUR billion  
1) Labour incomes  
2019  
2020  
2021  
2022e  
1
the International Monetary Fund (IMF) , which is more than the loss  
(
7 533  
3.5  
7 364  
-2.2  
7 767 8 217  
of production due to the Covid-19 pandemic. Supported by ECB asset  
purchases (EUR 1,850 billion devoted to the pandemic emergency pur-  
chase programme) public aid was deployed even as private spending  
was being hampered, which is illustrated in the agents account by the  
swelling of savings (up 50% for Eurozone households in 2020).  
Annual variation, %  
(2) Property incomes  
Variation annuelle, %  
5.5  
681  
1.2  
5.8  
722  
6.0  
790  
-2.1  
158.0  
29.9  
1 223  
3.6  
673  
-14.8  
420.0  
166.4  
1 192  
-2.5  
(
3) Net transfers  
Annual variation, %  
4) Taxes  
334.0 267.2  
-20.5 -20.0  
1 272 1 348  
6.7 6.0  
7 510 7 858  
In 2021, the situation gradually returned to normal thanks to the  
easing of health restrictions. Consumption rebounded while savings  
rate contracted. Europe – and the United States even more –  
successfully managed to support demand, but at the price of a growing  
disequilibrium with supply, which at the global level, continued to be  
strapped by the Covid-19 pandemic. For roughly 150 million Eurozone  
households, the price tag for “whatever the cost” ended up taking the  
form of inflation, which was only exacerbated by the war in Ukraine.  
With the ECB forecasting average annual inflation of nearly 7% this  
year – the fastest price inflation in 40 years – it will be hard to avoid  
a net decline in household purchasing power in 2022, unlike in 2020.  
(
Annual variation, %  
(5) Gross disposable incomes = (1) + (2) + (3) - (4)  
Annual variation, %  
7 258  
3.3  
7 265  
0.1  
3.4  
1.1  
4.6  
Annual variation, real, %  
2.1  
-0.4  
-2.4  
(6) Gross savings  
952  
8.3  
1 428  
50.0  
19.7  
5 933  
-7.4  
1 319 1 048  
Variation annuelle, %  
-7.6  
17.6  
-20.5  
13.3  
Percent of disposable income (savings rate)  
13.1  
6 407  
2.5  
PRICES SOAR IN 2022, ERODING HOUSEHOLD PURCHASING POWER  
(
7) Final consumption = (5) + (8) - (6)  
6 293 6 912  
Although bolstered by minimum wage increases, which in some cases  
Annual variation, %  
6.1  
3.7  
9.8  
2.8  
2
were very substantial , wages will decline in real terms in 2022. In  
the short term, wages have only partially adjusted to the inflationary  
shock (for skilled workers in France, the INSEE estimates wage elas-  
Annual variation, real, %  
1.4  
-7.9  
(
8) Adjustment (change in pension funds net worth)  
101  
96  
102  
102  
3
ticity at 0.45 over two quarters ), and the catching-up movement will  
take time. This inertia seems to have increased since the 2008 crisis,  
and is due above all to institutional factors. With a few exceptions, like  
in Belgium, automatic wage indexation systems have been eliminated  
in the Eurozone. The declining weight of unions and a series of flexibi-  
lity laws have accompanied the decentralisation of wage negotiations,  
with companies playing an ever more important role. Wage increases  
are now based on agreements that cover longer periods of time and  
do not integrate instantaneous pricing trends but rather price expec-  
Private consumption expenditures deflator  
Annual variation, %  
2 019  
1.1  
2 020  
0.6  
2 021 2022e  
2.3 7.0  
TABLE 1  
SOURCE: ECB ; BNP PARIBAS ESTIMATE (E)  
4
tations (Insee, 2022 ). At a time when soaring input prices are already  
2
.5% in 2022. Note that the loss of purchasing power, which is already  
squeezing margins, many business leaders would prefer to offset infla-  
tion for their employees via profit-sharing plans or bonuses rather than  
to increase their fixed expenses, especially when they fear the cyclical  
environment could deteriorate in the months ahead.  
significant, would have been much worse without government action.  
In France, Germany Italy and Spain, various measures were taken to  
buffer the inflationary shock (price freezes, tax cuts and subsidies),  
which totalled EUR 110 billion in 2022, the equivalent of nearly two  
According to the ECB’s most recent outlook (June), per compensations points of disposable income6.  
per head in the Eurozone are expected to increase 4.2% in 2022, with  
a 1.9% increase in the number of employees. As a result, total labour  
incomes should rise by about 6%, or possibly a little less considering  
The loss of purchasing power did not result in a decline in consump-  
tion because European households dipped into their savings. Yet this  
formula is somewhat misleading. From a macroeconomic perspective,  
households rarely dip into savings to consume more than they bring  
in, or in other words, when the savings flow becomes negative. The  
5
the recent dip in hiring intentions . Since transfers continue to decline  
(
essentially due to the halting of emergency measures decided as of  
fall 2021, but also thanks to the decline in unemployment) and taxes  
are bound to increase in proportion to revenues, the rise in disposable  
income should hold to a less steep slope of about 4.5%. With 7% infla-  
tion, the decline in household purchasing power can be calculated at  
freeing up” of funds that were not spent during lockdown periods are  
now resulting in less accumulation of savings: EUR 1,050 billion in  
022 (13.3% of disposable income, which is close to the pre-pandemic  
level) compared to EUR 1,320 billion in 2021 (17.6% disposable income)  
2
1
Direct transfers, deferrals and exempted charges, excluding guaranteed loans. See IMF (2021), Country Fiscal Measures in Response to the COVID-19, Fiscal Monitor Database,  
October.  
2
1
3
4
5
In Germany, the hourly minimum wage will be raised from EUR 9.82 to EUR 10.45 in July and then to EUR 12 in October. In 2022, the average annual minimum wage will be EUR  
0.52, a 10.2% increase compared to 2021 (EUR 9.55).  
Insee (2017), The Mesange macroeconometric model, re-estimations and innovations, Working document 2017 /04, pp 61-62, May.  
Insee (2022), Economic Note, pp 37-38, March.  
European Commission surveys of business leaders indicate that hiring intentions eased slightly in all sectors after peaking in February 2022. This leading indicator is highly  
correlated with annual employment trends, with a lead of one or two quarters.  
6
Colliac S., Derrien G., Krief E. (2022), Energy price inflation in the Eurozone: government responses and the implication for household purchasing power, BNP Paribas Eco Flash  
n°22-09, May.  
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resulting in the transfer of EUR 270 billion (4.3 percentage points)  
towards consumption (see chart). In real terms, it would continue to  
grow by a little less than 3% in 2022.  
This being an aggregate trend, it does not say anything about the he-  
terogeneity of situations in the face of resurging inflation. Inflation can  
be seen as an arbitrary tax that strikes low income households the  
hardest. Faced with price shocks, low-income households can hardly  
opt to reduce savings, which are quasi-inexistent. Hedging between  
expenditures is all the more difficult when pre-committed or unavoi-  
dable expenses (mainly housing and food) gobble up the lion’s share of  
7
household budgets . Eurozone consumption might be resilient, but only  
in a very unequal manner.  
*
**  
In 2020 and part of 2021, government policies sought to counter the  
depressive effects of the Covid-pandemic and successfully managed to  
preserve household purchasing power. In 2022, the inflationary counter  
shock has led them to take similar actions, albeit with much less fis-  
cal manoeuvring room in a less accommodating financial environment  
(
the ECB has halted its securities purchasing programmes and interest  
rates are rising), but also through necessary greater discrimination.  
7
In 2017, French households in the first income quintile (the 20% with the lowest income) had a savings rate of 2.7%, compared to a national average of 15.9%. Pre-committed  
or unavoidable expenditures accounted for 65% of their total consumer spending, compared to 50% for households in the 5th quintile. See Accardo J., Billot S., (2020), High income  
households save more, low income households spend more on unavoidable expenses. Insee Première n°1815, September.  
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