Improvement of health situation drives consumption but continuity is uncertain

06/20/2022

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Carlos Antonio Rocca — Foto: Silvia Zamboni/Valor

After rising for seven quarters in a row since the pandemic hit Brazil, in early 2020, household saving has shrunk in the first quarter of this year, a survey by the Center of Capital Markets Studies of the Economic Research Institute Foundation (Cemec-Fipe) shows.

The declined of R$32.4 billion compares with a R$75.8 billion increase in the fourth quarter of 2021. The amount accounts for 6.1% of net household saving amassed between early 2019 and that moment, which totaled R$529.7 billion at the end of 2021. As a result, the amount held until the first quarter of 2022 fell to R$497.1 billion. The figures include savings accounts, investment funds, stocks, bank deposits, government and corporate bonds and bank funding.

The fact that more people are moving around and the lower uncertainties about the pandemic help to explain this situation, experts say. The phenomenon has driven a higher consumption in the first months of the year, as GDP data for the period already show. Other reasons may explain this: rising inflation and lower average income. Economists believe that lower household saving rates may remain in place, but will have a limited impact on consumption considering higher indebtedness and interest rates.

Two factors that helped increase household saving during the pandemic ceased to work or lost steam this year, said Carlos Antonio Rocca, the coordinator of Cemec-Fipe. There was a circumstantial factor caused by social distancing measures, which restricted consumption alternatives, especially services; and there was a precautionary factor caused by uncertainties related to the health crisis, which made people more willing to hold on to money.

“The reduction in household saving in the first quarter is not dramatic at all, but it indicates a falling trend. The number of cases and deaths fell,” he said. “The pandemic is perceived as more controlled, and uncertainties are lower as well,” the coordinator of the study said.

Since there are no indications that household saving has moved to real estate or investments abroad, Mr. Rocca highlighted that savings helped to drive consumer spending in the quarter, considering goods and services.

Marcelo Kfoury Muinhos, a professor at FGV’s São Paulo School of Economics, also sees a relationship between lower household saving and rising consumption in this group in the first quarter, as seen in GDP growth data.

“People started to spend savings amassed over the pandemic. Part of this has already translated into stronger GDP growth in the first quarter,” he said. The economist links the phenomenon to several factors, including the fact that society is going back to normal regarding the health emergence situation, the falling average income caused by a labor market recovery with lower-paid jobs, and some effects from inflation.

Household saving behave accordingly to income brackets, said Isabela Tavares, an economist at Tendências Consultoria. “In poor households, the drop follows the inflation and the pressure on the household budget. The savings mean relief for what people need to consume and to pay bills, for instance. On the other hand, segments of essential items more linked to high-income households have been a highlight in this moment of normalization of the pandemic,” she said.

Previous studies by Cemec-Fipe have suggested that people who managed to amass less money were withdrawing funds from savings accounts in 2021. In the most recent study, along with the general phenomenon of shrinking household saving, Cemec-Fipe found that household investment portfolios have changed as funds from savings accounts, investment funds and stocks were moved to more profitable fixed-income assets after the Central Bank started raising interest rates.

The savings amassed during the pandemic are expected to shrink even more, but economists are divided about the effect on consumption.

Mr. Rocca believes that the trajectory seen in the first quarter raises the probability of this movement over 2022. Should the pandemic remains under control over the year, the household saving rate would shrink by R$130 billion, which would allow household consumption to grow by 2%, more than the projections for GDP growth, which are around 1.5%, he said. “This could drive consumer demand, and it could be substantial, since it represents nearly 9% of total consumption in 2021,” he said.

A little more cautious, Mr. Muinhos believes that the household saving rates are likely to shrink even more, but he does not consider the impact on consumption a given. Confidence data are improving for now, but the activity indicators are not all advancing in the same direction.

Ms. Tavares believes that household demand will be lower throughout the year, but will end the year above the levels seen before the pandemic. But the pressures of higher interest rates on loans and debt will limit the amount of funds that reach consumption. She estimates that household savings will fall by 1.5%, considering savings accounts, capitalization title (a type of savings scheme with drawings), private pension, government bonds and fixed-rate corporate bonds, after increasing 19% in 2020 and  falling 4% in 2021. “The net result is still positive,” she said.

*By Lucianne Carneiro — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/