Household pandemic savings are starting to wane

It still seems a strange combination but the period of the global pandemic was a wonderful time to save.

Governments both State and Federal were showering all sorts of largesse on ordinary taxpayers – something that many of us have never experienced before.

That coincided with a time in which it was extraordinarily difficult to spend much money due to restrictions on travel and all but essential shopping and also a time when ultra-low interest rates made servicing a home loan relatively easy.

The end result as estimated by Commonwealth Bank, is that Australians built up an extraordinary store of extra savings of $300 billion.

Much of the $300 billion will be gone by Christmas

The bad news is that the Commonwealth also projects that this extraordinary burst of extra savings could be pretty much used up by the end of this year.

As the Commonwealth’s head of Australian economics, Gareth Aird, puts it: “Australian households are generally net savers, as evidenced by a positive savings rate on average over time.

“As such, total household savings are almost always on an upward trend.’’

Unfortunately, that upward trend came to an end by late 2022 as increased mortgage payments and a general increase in spending met rising prices for goods and services.

“The decline in additional savings has meant that consumer spending for much of the past two years has been supported by a notional savings drawdown,’ Mr Aird said.

“We say notional as overall savings are still growing.’’

Might be gone already?

Not everybody agrees that there is still some excess savings to draw down on.

Research by Yarra Capital Management found that younger households probably spent the last of their pandemic-era buffers around March this year, with younger consumers who are struggling with cost-of-living pressures using savings to buy essentials.

“The message for policymakers is that there is no longer a liquid buffer of excess household savings to draw upon, and it’s likely that most households in the sub-65 year-old age bracket have drawn down savings buffers to below pre-COVID levels,” said Yarra head of macro and strategy, Tim Toohey.

About $140 billion already spent

Using Commonwealth’s figures, around $140 billion of the additional savings had been drawn down by the first quarter of this year.

“Based on our forecasts for household income and consumption over 2024, the stock of ‘other’ excess savings accumulated over the pandemic will continue to decline until it is essentially exhausted by the end of 2024,” said Mr Aird.

“This means that the tailwind of the savings drawdown on household consumption should have run its course by the beginning of 2025.’’

Offsets to the rescue

All is not lost, however, because a large amount of excess additional savings that was accrued during the pandemic is sitting in mortgage offset and redraw facilities.

That means it is still benefitting households by reducing mortgage interest but these offsets have been hard won and most people are very reluctant to use up these savings.

“Indeed, households are still adding to redraw and offset accounts,’’ said Mr Aird.

“The large increase in the average outstanding mortgage rate due to RBA interest rate hikes increases the incentive for households to preserve buffers built up in offset and redraw facilities.’’

Financial stability has improved

Even without spending these offset amounts, the economy is still benefitting from this savings pool through greater financial stability.

“It means that many households have some wriggle room if they were to get into financial difficulty, particularly given the unemployment rate is forecast to continue to lift,’’ said Mr Aird.

Of course, there will always be a battle by retailers and others to try to loosen these savings and get them running through their tills but the Commonwealth Bank research concludes that most households will hold their nerve and leave those offset savings exactly where they are,” he said.

Complicating the picture is the extent to which the tax cuts will feed into savings and the success of the Reserve Bank in reducing consumer spending and inflation through its higher interest rate policy.