How consumers have exhausted the savings built up during the Covid-19 pandemic

The evaporation of a savings buffer built up during Covid-19 means consumer spending will remain soft and personal tax cuts will not work as effectively.

The savings buffer created during the pandemic has all but evaporated.

Australians have almost completely drained their bank accounts of any savings they built up during the pandemic.

The “savings buffer” cited by everyone from top bankers to leading economists has all but evaporated in recent months, as consumers used those funds to finance ongoing cost-of-living demands.

Coupled with a plunge in ongoing savings activity – signalled by the drop in the rate of savings – the development will have major repercussions in the months ahead. Commonwealth Bank has examined the numbers and suggests the change will serve to “mute” the impact of personal tax cuts meant to buoy the economy in the second half of the year.

With the exception of saving activity relating to mortgages, Australian consumers tapped their rainy day funds heavily throughout the course of the last 12 months. In fact, the amount of money switched from savings to spending was enough to make recent interest rate lifts from the RBA less effective.

And the trend still has a few months to go before pandemic period savings accounts are fully tapped out, as CBA notes: “The stock of additional savings accumulated during the pandemic period will be largely exhausted by the end of 2024.”

So what happened?

Australian households had built up around $300bn in additional savings during the pandemic.

Commonwealth Bank head of Australian economics Gareth Aird says: ‘We do believe that rate relief is required to generate a meaningful lift in consumer spending.’

At the same time, the savings rate during the pandemic period charged ahead too, rising from a long-term average rate of around 6 per cent to a sky-high level of more than 20 per cent.

The report from the CBA global economics team says the vast bulk of the extra savings from the pandemic period ($220bn of the $300bn saved overall) was in “other savings”. Around $140bn of those savings have now been drawn down.

A concern expressed by the bank is that the surge in spending financed by savings “has meant that consumer spending for much of the past two years has been supported by a notional savings drawdown”.

On top of that, the savings rate has now shrunk to rock bottom levels – after peaking above 20 per cent in 2020, it is now around 1.6 per cent.

The bank even goes as far as to say that the RBA “has underappreciated the impact this savings drawdown has played in supporting household consumption since the economy reopened”.

The exception in the trend is the amount of mortgage-related money going to offset and redraw facilities at banks – indicating once again that Australians are determined to pay off their mortgages regardless of other cost of living pressures.

Mortgage-related saving held in offset and redraw continues to climb, and CBA says households do not want to draw down on these savings.

Overall, CBA expects that the period of huge savings withdrawals may now be coming to a close, as the amounts held in savings accounts has dwindled from those record levels.

It suggests “the overall savings rate may edge up in the months ahead” as the savings landscape returns to normal.

As Gareth Aird, head of Australian economics for CBA suggests: “We do believe that rate relief is required to generate a meaningful lift in consumer spending.”

Mr Aird says the rate cutting cycle should begin in November, though the bank’s broader forecast for the economy is not deeply dependent on the exact timing of a change in approach from the RBA.

Nevertheless, the bank says the economic outlook is finely poised. It also says the outlook for a lowering of interest rates in Australia “looks less assured than in other jurisdictions”.