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The IMF’s economists say European consumers need to decide what to do with their new-found nest eggs.Yuri Gripas/Reuters

What would you do with a trillion euros?

That’s the question facing European consumers as they look ahead – tentatively, like everyone else – to the winding down of COVID-19 restrictions and a return to something like normal in 2022. The International Monetary Fund recently estimated that during nearly two years of pandemic, households in the euro area have accumulated nearly €1-trillion (about $1.44-trillion) in excess savings, relative to what they normally would have socked away in the absence of a global health crisis.

What Europe’s consumers decide to do with their new-found nest eggs, the IMF’s economists said, is a potentially huge wild card in how the economic recovery – and, crucially, inflation – evolve over the next couple of years.

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“Even a moderate increase in spending — if households were to use about one-third of their excess savings for higher consumption over two years, say — would add 2.5 percentage points to GDP and up to 0.75 percentage point to inflation by the end of the second year,” they wrote in a report posted to the international financial institution’s website.

This conundrum is, of course, far from unique to the European Union. The combination of massive government supports and public-health measures has fed a swelling of household savings in many advanced economies, as money that would have gone to restricted activities such as travel and entertainment has stayed in bank accounts.

What’s deeply unclear in all these advanced economies – Canada’s included – is what sort of appetite households will have to spend this extraordinary build-up of money. It’s assumed that a sizable chunk of it will get spent over the next couple of years. But just how much they will spend, and how quickly, is a major wild card for governments and their central banks as they look to wind back their highly stimulative policies and try to rein in the highest inflation rates in a generation.

Last spring, credit rating agency Moody’s estimated the global savings glut from the pandemic at US$5.4-trillion, equal to about 6 per cent of the world’s GDP. In the United States alone, excess savings total about US$2.6-trillion, according to more recent figures. The Bank of Canada has pegged the Canadian total at about $200-billion – equal to about 8 per cent of GDP, which roughly matches the scale of the European build-up.

The IMF economists were quick to cite several reasons they anticipate “some unwinding, but no spending spree” – all of which are applicable to Canada’s situation, too.

First, some spending opportunities that consumers have missed during the pandemic won’t be replaced. Most of the foregone spending – nearly 80 per cent in Europe, by the IMF’s estimates – has been in hospitality and transportation. People are unlikely to double and triple up on vacations, air flights and hotels to make up for the trips they didn’t take the past two years.

The IMF also noted that the bulk of those savings have built up in the accounts of high-income households – which already typically spend less and save more of their earnings. There’s not a lot of reason to expect them to dip deeply into their funds to finance their postpandemic indulgences.

Still, the IMF researchers acknowledged that they really don’t know how much of these pent-up savings will get unleashed in the coming months into economies that are already wrestling with strong demand and severely strained supply chains.

“Uncertainty surrounding the outlook for consumption remains exceptionally high,” they said.

The Bank of Canada, for its part, has forecast that Canadian consumers will draw down about 20 per cent of their excess savings over the next couple of years. Bank of Canada Governor Tiff Macklem repeated that assumption in a couple of public appearances last month.

The figure does look surprisingly low, especially when you see the IMF using 33 per cent as a possible scenario. Similarly, the European Central Bank used 30 per cent as a hypothetical figure in an analysis of the savings issue last year. Given that European savings rates are usually about twice as high as those in Canada, it seems that if anyone is more likely to spend more of their pandemic accumulations, it would be Canadians.

However, it’s notable that Canada’s household debt loads are also much higher than those of the EU. The Bank of Canada has noted that Canadians have been using their extra savings to reduce consumer debt. That national debt overhang could temper how much of that extra money consumers are ultimately willing to spend.

In an appearance before the Senate banking committee in early February, Mr. Macklem indicated that the degree to which consumers spend their savings glut is a crucial factor in how hot the economy will be in the coming months – and, by extension, much and how quickly the central bank needs to raise interest rates.

“It’s clear that interest rates need to be on a rising path,” he said. “If consumers spend more, the slope of that path will likely have to be steeper.”

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