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Euro Area Households: Still Hoarding Excess Savings – September 5, 2023

Last week we examined the outlook for the euro area economy and related asset markets. The economy has once again disappointed this year, as trade and manufacturing are caught in a global downturn, albeit one that looks to be nearing an end. However, the main disappointment this year has been the cautiousness of domestic consumers, who are travelling more than in recent years, but overall have been restrained.

Unlike U.S. households, who have been steadily running down the massive “excess” savings that build up during the pandemic shutdowns and related massive fiscal transfers, euro area households have sat on their cash hoard. U.S. and euro area income growth is solid as labor markets have significantly healed, but euro area consumption has been sluggish. In terms of catching up to the U.S., euro area consumers need to feel better about the durability of the economic expansion and to have greater certainty about the future, especially with regards to energy supply and prices. It could take until this winter has passed without painfully high energy and electricity prices (and greater confidence in future energy supplies) before euro area consumers “relax” and spend at a greater pace.

Valuations of regional equities and the euro are sufficiently compelling that we are maintaining overweight positions in both to benefit from what we anticipate will be a positive economic outcome in the euro area. Stay tuned.