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Is this the goldilocks recovery?
Strong consumer savings throughout the COVID-19 pandemic are tipped to drive global growth over the medium term, with consumer spending ultimately deciding the economic outlook, new research has revealed.
Is this the goldilocks recovery?
Strong consumer savings throughout the COVID-19 pandemic are tipped to drive global growth over the medium term, with consumer spending ultimately deciding the economic outlook, new research has revealed.
Despite global governments spending trillions of dollars to prop up their economies, it appears consumers will ultimately decide the recovery.
BIS’ economic note revealed consumers worldwide collectively have an additional $4.7 trillion in savings largely driven by cashed stimulus cheques and lockdown-forced cutbacks.
According to the report, if the additional money is treated like any other increase in wealth, around 5 per cent will be spent on boosting consumption annually, which will drive the global recovery.
“Having accumulated the largest stockpile of excess savings, a rundown of savings would benefit the US and Canada most. European economies would also receive a substantial boost,” UBS chief global economist Innes McFee said.
According to the report, this will lead to an increase in business spending and investment which will further lift the economic outlook.
“As household spending and investment are both import-intensive forms of activity, much of the stimulus would leak out of advanced economies, raising world trade — by 0.6 [of a percentage point] in 2022 in the mild upside and almost 2.5 per cent in the upside,” Mr McFee continued.
Australia’s recovery
The RBA’s latest economic update also showed how quickly Australia recovers from the downturn will largely depend on consumers.
The RBA stated that much of the government support for businesses and households through programs such as JobKeeper and JobSeeker was saved.
If Australians return consumer spending to their previous levels, then the economy will heat up and the central bank will reach its inflation targets.
Under conditions where consumer spending lifts, private investment will increase, causing the unemployment rate to fall and the bank to reach its inflation targets of between 2 and 3 per cent by the middle of 2023.
“This could be in response to stronger wealth effects and a decline in uncertainty that boosts households’ willingness to draw down on savings, which reinforces already improving conditions in the labour market and feeds back into faster income growth,” the central bank said.
However, the central bank also pointed out Australians could use the additional finances to strengthen their personal position, which would see inflation stall to 1.5 per cent by mid-2023.
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