From saving due to 'obligation' to saving due to 'fear': the fall in household spending slows down the recovery

In the short term, it is of little use to have a large economic cushion if it is not used due to the prudence that inevitably arises in the face of new uncertainties. And it will be worse if it ends up being depleted by the bite of inflation. The nearly 80,000 million euros of excess savings accumulated by families during the pandemic, according to data at the end of 2021, are not mitigating (at least as expected) the blow of the war in Ukraine to economic activity, which already reflects a worrying slowdown.

Household spending suffered a contraction of 3.7% between January and March compared to the fourth quarter of 2021, according to the detail of the advanced GDP data published this Friday by the National Institute of Statistics (INE). Consumption was damaged first by the omicron variant of COVID, and then by the impact of the invasion that Russia began at the end of February and by the stoppage of the road transport sector around the same time.

Saving has gone from being forced during lockdowns and, subsequently, due to restrictions on mobility and social contact, to saving out of fear, conditioned by the context of extreme uncertainty implied by war and the acceleration of inflationintensified by the disturbance caused by the conflict in energy prices, despite the resilience of the labor market.

A fear that leads to postponing purchase decisions, waiting for a scenario of less tension to face large acquisitions or to request a loan. Or a fear of rising prices that forces you to lower the heating a couple of degrees, to use the washing machine less or to choose whiting instead of salmon in the supermarket.

"Families have lost confidence, there is fear of what is coming and they are containing the disbursement of savings," observes José Ignacio Conde-Ruiz, professor at the Complutense University and deputy director of Fedea. "That fear of the future is normal, which causes lower spending for the reason of precaution."

The 3.7% drop is the first contraction in household consumption since the first quarter of 2021. And it is one of the main reasons that explain the slowdown in the economic recovery in Spain, which grew by only 0.3% in the first quarter of this year, compared to the previous quarter, in which economic activity increased by 2.2%.

"The GDP data [del primer trimestre] it leaves household consumption at the same level as at the end of 2020, that is, it erases all the growth of 2021 with a stroke of the pen and remains 10% below the level prior to the pandemic", calculates Ángel Talavera, chief economist for Europe from Oxford Economics.

And Conde-Ruiz points out a contradiction: "It contrasts with the investment of companies, which is rising, so their confidence does not seem affected." Based on the data, gross capital formation increased by 2.4% in the first quarter (see graph), while, within this GDP heading, fixed capital formation (investment in machinery, buildings...) grew to 3.4%, after doing another 3.1% in the fourth quarter. Always with respect to previous periods.

“Employment and investment are the main engines of recovery [ante la puesta en marcha de los proyectos de los fondos europeos y la progresiva recuperación del turismo internacional]”, explained Nadia Calviño, Minister of Economy and First Vice President, after knowing the GDP growth data in the first quarter, regarding which she highlighted that all the components have completed the reconstruction after the pandemic with the exception, precisely, of private consumption and, on the other hand, construction.

In fact, according to forecasts for all of 2022, from 4.8% of the International Monetary Fund (IMF) to 4.5% of the Bank of Spain, to the recent 4.3% of the Government itselfrecovery will not be completed until the first half of next year.

The main risk to growth comes from inflation itselfdue to its impact on the real spending capacity of households, on business margins (ability to obtain benefits from income) and on the foreign sector, by deteriorating the competitiveness of Spanish exporting companies compared to competitors from other countries and by the general impact of the war on world activity.

The Funcas analysis center sees the average CPI in 2022 at 6.8%; the Bank of Spain, at 7.5%; and the Independent Authority for Fiscal Responsibility (AIReF), at 6.2%. That, without including the cap on the generation of electricity with gas to lower the electricity bill, recently approved by the European Commission. Although these projections also do not take into account a feared power outage from Russia.

"Expectations regarding the current quarter are improving", recognizes the General Council of Economists (CGE). "There is a certain optimism mainly due to the good behavior of tourism last Easter, at rates similar to 2019, which represent a great positive boost for consumption and growth," he adds in a report published this Friday.

"This suggests that, if tourism expectations for the summer are maintained, as long as there is no rebound in COVID infections, it could return to the situation prior to the pandemic, with the effects it has on growth given the weight of the tourism sector in Spanish GDP", concludes the CGE.

Other voices point out that the strength of the labor market, with the record of affiliates and the greater number of permanent contracts, should become a positive surprise for growth in the coming quarters. While, on the contrary, the tightening of financing costs also subtracts from consumption and investment –The Euribor closed April in positive, raising mortgage interest–.

The comparison of the quarter-on-quarter growth data of the large European economies shows a lesser slowdown in Spain, with the exception of Portugal, whose GDP achieved an extraordinary advance (see graph). In Germany, economic activity contracted in the fourth quarter of 2021. While the same thing happened in Italy in the first quarter of 2022, and also in Sweden.

Some economists consulted by point out that in this comparison one could see the consequences of the direct impact of the war in Ukraine on the Central European countries and, at least in part, the effect of the accumulated savings in Spain. Undoubtedly, the Government continues to trust in family spending as one of the engines of recovery, despite inflation and uncertainty.

This is emphasized in the national reform program sent to Brussels this Friday: "Private consumption will continue to contribute about half of the growth to the recovery, growing about 4% in 2022, supported by the favorable evolution of employment, throughout which will be added to the savings pool generated during the pandemic.The savings rate ended 2021 at rates close to 10%, below the peak of 22.3% reached at the start of the pandemic, but still higher than the pre-previous average. crisis (6.8% in 2015-2019)".

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