Perspectives

Income uncertainty boosts precautionary savings

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Eco Perspectives // 1 quarter 2021  
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GERMANY  
INCOME UNCERTAINTY BOOSTS PRECAUTIONARY SAVINGS  
The second lockdown interrupted an already stalling recovery. However, the business climate is likely to improve  
soon on the expectation that several vaccines might soon be available. Inflation is currently in negative territory  
because of the VAT cut, but will soon turn positive again once the measure expires on 1 January 2021. Because of the  
second lockdown, the 2021 budget will show a larger deficit than assumed in September, EUR180 bn or 5.2% of GDP.  
In Q2, the household savings rate rose to 20.1%, a new historical high. Once the pandemic is over, the savings rate  
could drop considerably if consumers catch up on postponed purchases.  
LOCKDOWN INTERRUPTS RECOVERY  
GROWTH AND INFLATION (%)  
After a historical contraction of 9.1% in Q2, GDP rebounded vigorously  
in Q3 by 8.5%, which was slightly better than expected. Nevertheless,  
GDP Growth  
Inflation  
activity was still 3% lower than a year earlier. The rebound was partly  
due to the progressive lifting of the lockdown measures from end of  
April onwards. Moreover, activity was also boosted by the government  
stimulus programme launched in June. Nonetheless, in the course of  
Q3, business cycle indicators signalled that the recovery was losing  
momentum. The ifo climate indicator peaked in September well be-  
low the pre-crisis level. Moreover, despite an impressive rebound, GfK  
consumer confidence index remained in negative territory, as the pro-  
pensity to buy stalled owing to fears about a second wave of infections.  
Forecast  
.2  
Forecast  
4
5
3
3.6  
1
.4  
1.3  
1.2  
0.6  
0
.4  
1
-1  
-
-
3
5
Following the sharp rise in infections, new restrictions were necessary.  
However, the government initially did not want to decree full lockdown,  
as it would make one of its key measures – the cut in the VAT rate  
from 1 July – ineffective. Only bars, restaurants and theatres wear  
closed but non-essential shops stayed open. As infections remained  
at a very high level, at mid-December the authorities decided finally  
also to close non-essential shops, schools and nurseries. In addition,  
employers were asked either to close their companies for holidays or  
to enable working from home.  
-7  
-5.9  
2020  
2019  
2021  
2022  
2019  
2020  
2021  
2022  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
LIGHT LOCKDOWN HAS FAILED TO CURB COVID-19 INFECTIONS  
End November, the ifo climate index lost 2.5 points, due to considerably  
more pessimistic expectations, in particular in services. Also the GfK  
consumer confidence index plunged deeper into negative territory.  
However, even though the actual business situation has deteriorated,  
it is possible that expectations in have improved in December, amid  
reports that several vaccines might soon become available, one of  
which from the German firm BioNTech together with the US firm Pfizer.  
The government is preparing a vaccination campaign, but it might take  
up until 2022 before the whole population has been vaccinated.  
thousands  
Oxford Stringency Index  
1
40  
120  
00  
25  
New Covid-19 cases (7 days moving average, RHS)  
20  
15  
10  
5
0
1
8
6
4
2
0
0
0
0
0
TEMPORARY VAT CUT RESULTS IN LOWER PRICES  
Even though wages have not progressed much, purchasing power of  
employees improved considerably in the second half of the year as  
consumer prices declined following the temporary cut in the VAT rate.  
With effect as from 1 July, the standard rate was cut from 19% to 16%  
and the reduced rate from 7% to 5%. If enterprises had fully passed  
on the VAT cut to consumers, HICP inflation would have been lowe-  
red by 1.8 percentage points. This has not been the case. In October,  
consumer prices were 0.5% lower from a year earlier. According to the  
Bundesbank, the VAT cut appears to have been passed on fully for most  
CHART 2  
SOURCE: ECDC, UNIVERSITY OF OXFORD  
2
021 BUDGET DEEPER INTO THE RED  
food products and industrial goods excluding energy. In some cases, As the economic consequences of the coronavirus pandemic will  
the price declines went even well beyond the VAT effect. By contrast, continue to be felt next year, fiscal policy will be very accommodating  
in services only one third of the lower tax rate appears to have been in 2021. The escape clause of the federal government’s debt brake  
passed on. Only in a few areas such as telecommunications, prices and the EU budget rules are to remain active. End November, the  
were reduced. The VAT cut will expire on 1 January 2021, and inflation Parliamentary Budget Committee reached agreement with the  
should return to significantly positive values. In 2021, inflation could government on a revised budget for 2021, foreseeing EUR 180 bn  
reach 1.3 compared with 0.4 in 2020.  
(5.2% of GDP) in new debt compared with EUR 218 bn in 2020. This is  
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Eco Perspectives // 1 quarter 2021  
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substantially higher than the EUR 96 bn finance minister Olaf Scholz  
presented in his original draft budget in September.  
PROBABILITY DISTRIBUTION OF EXPECTED INDIVIDUAL  
MONTHLY INCOME CHANGES  
Federal spending will be close to EUR 500 bn, about the same level as  
in 2020. Compared to the original draft, expenditure will be increased  
by EUR 85 bn to cover the additional costs related to the new lockdown  
and the vaccination. By contrast, tax receipts should be slightly higher,  
as the economy is doing better (EUR 293 bn compared with EUR 265  
in 2020). Much is done to reduce the tax burden for household. From  
%
40  
35  
30  
25  
20  
15  
10  
5
0
Decrease  
Increase  
2
021 onward, many citizens do not longer pay the solidarity levy.  
€0 - €250  
Moreover, families will receive more child support: EUR 15 per month  
and per child. For all households, the basic tax-free allowance will be  
increased. A major question is when parliament will reactivate the debt  
brake mechanism. As the general election will be held in autumn 2021,  
that will be for the next parliament to decide.  
2000 or more  
€1000 - €1500  
HOUSEHOLD SPENDING DURING THE PANDEMIC  
2
000 1500 1000 500  
0
500 1000 1500 2000  
The lockdown measures and distancing rules have resulted in  
significant income losses for the household sector. In Q2 and Q3, net  
wages and salaries contracted by 3.8% and 0.5%, respectively. This  
implies that the average employee lost around EUR 130 a month in  
Q2. Thanks to increased social security spending, the annual change  
in disposable household income amounted to -0.8% in Q2 and +0.7%  
in Q3. At the same time, household consumption sharply declined due  
to the closure of non-essential shops, bars, restaurants etc. Moreover,  
as income uncertainty increased, consumers became more reluctant to  
spend. As a result, the savings ratio has risen to 20.1 in Q2, a highest  
since the start of the series in 1991, and eased down to 13.5 in Q3. The  
latter was still well above the long-term average (10.8). It is expected  
that consumption could rebound and the saving ratio could return to  
close to its long term average once the pandemic is over and public life  
has returned to normal. The savings rate could even drop considerably  
below its long-term average if consumers catch up on postponed  
purchases.  
SOURCE: DEUTSCHE BUNDESBANK ONLINE  
PANEL HOUSEHOLDS (BOP-HH)  
CHART 3  
that it did not have any significant impact on expectations about  
income. Moreover, individuals who received information on stimulus  
packages actually provided a lower estimate on GDP growth. A possible  
reason is that the policy announcements signalled to households  
that the economy was in a weaker state than they had assumed. The  
researchers found that credit-constrained households became more  
optimistic after having received news about the policy announcements.  
These households are probably already aware of the economy being  
in dire straits. Any announcement of an expansionary policy, might  
lead to an upward revision of their expectations. By contrast, credit  
unconstrained households became more pessimistic, suggesting that  
in their case the signalling effect dominated.  
It would be wrong to conclude from this research that stimulus pac-  
kages do not affect household spending. By their effect on employment  
and income expectations, they can have an important impact once  
implemented. The Bundesbank research brief demonstrates primarily  
the importance of carefully announcing these programmes to prevent  
households reacting negatively to them.  
In May, the Bundesbank has conducted a survey on how household  
budgets have been affected by Covid191. It found out that on average,  
more than 40% of respondents incurred income or other financial  
losses due to the pandemic or the policy measures addressing it.  
Not surprisingly, the number is much higher for people in the labour  
market (46%) than the rest of the population, mainly pensioners (28%).  
On average, the Bundesbank panel expects their monthly net income  
to fall, on average, by EUR 64 per month over the following twelve  
months. Compared to the previous survey in May 2019, spending  
intentions were lowered driven by income losses and higher inflation  
expectations. The latter is surprising as in standard economic theory  
spending on durables would increase if one expects inflation to be  
higher. The loss in income only had a limited effect on the marginal  
propensity to consume.  
Completed on 13 December 2020  
Using the Bundesbank household expectations survey, a different group  
of researchers at the Bundesbank have studied how households react  
to policy announcements2. The panel was divided in four groups, three  
of them receiving relevant information about actual announcements  
and the fourth one receiving irrelevant information, a so-called placebo  
treatment. All the three policy measures were expansionary and should  
have boosted household confidence. However, the research showed  
1
René Bernard, Panagiota Tzamourani, Michael Weber, How are households’ consump-  
tion plans affected by the COVID-19 pandemic?, Research Brief | 35th edition, November  
2
020  
Olga Goldfayn-Frank, Georgi Kocharkov, Michael Weber,, Households’ Expectations  
2
and Unintended Consequences of Policy Announcements”Research Brief | 34th edition,  
November 2020  
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