An erroneous view of the economic situation leads families to curb consumption

The inflation crisis, housing, the trauma of the real estate bubble and demographic changes have distorted families’ perception of the economic situation. Even on their own income and purchasing power, adding an extra bit of pessimism. This erroneous view of the economic situation leads households to curb consumption and save what they can, in some cases out of caution or fear and, in others, to be able to aspire to buy or rent a house.

The data is as follows. Almost 67% of families in our country affirm that their income has decreased in the last year. Only one in four says they have been maintained. And only 8.5% indicate that they have increased. These are the responses collected by the consumer expectations survey of the European Central Bank (ECB) and the Bank of Spain, carried out in September.

These results show a gloomy picture of our economy. A pessimistic perception that contrasts with the figures, forecasts and statistics that highlight the growth of activity, employment and incomes, especially the lowest ones, in recent years in Spain. The central bank’s own analysis warns of this shock – as seen in the first graph of this information – and highlights that the observed reality is different, more positive: only 23% of households have suffered a drop in their income. , just over half have maintained them and one in four has raised them.

The big problem with this erroneous view of the economic situation is that it leads families to curb consumption, according to the Bank of Spain. According to their calculations, “the differential impact” on household spending of having an “unfavorable” perception of the evolution of their income is close to 2,000 euros on average per year in non-durable goods (food, fuel, cosmetics and personal hygiene, cleaning or medications); of just over 1,500 euros in leisure and transportation; and around 500 euros in clothing and footwear.

That is, the most pessimistic consume less, and that is one of the main reasons why, in the National Accounts, the growth of family spending lags behind the growth of aggregate GDP. A final example given by the Bank of Spain: one in four households that receives an income lower than what they really have has delayed the decision to purchase a car.

The financial regulator’s economists clarify that for the perceived evolution of income (in the first graph of this information) the proportion of households that perceive that household income has grown more, less or approximately the same as prices between September 2023 and the same month of 2024. For the observed (real) evolution, it includes the proportion of households for which the labor income reported by the respondent has grown more, less or equal to the inflation observed in the same period. Information is available on income by range—by deciles, from the poorest 10% to the 10% with the highest income—“so the percentage of households in which the respondent indicates that their labor income has increased includes those that have moved to a higher income range, or vice versa if they have fallen.”

One of the most reliable statistical sources to measure the evolution of salaries – the main source of income for families – is the Salary Structure Survey (EES), which was recently published and which elDiario.es analyzed in this article. According to the data from this survey, which is carried out every four years, and which in its latest wave offers information on 2022, compared to 2018, the salaries of Spaniards have increased strongly, and mainly the lowest ones, thanks to the salary increases. Minimum Interprofessional (SMI) and the reduction of the temporality of contracts due to the labor reform.

In fact, if the accumulated inflation from 2018 to 2022 is discounted, at 12.5%, 30% of the poorest – the three deciles with the least income – have gained purchasing power in the period analyzed, according to this survey, and the rest have barely lost, despite the price crisis, especially intense precisely in 2022. These data agree with the reality observed by the study by the ECB and the Bank of Spain.

The financial regulator’s economists have delved into these issues, to look for causes and consequences. “What proportion of a lottery prize equal to one month’s income would you spend over the next 12 months?” That is the question with which the Family Financial Survey (EFF) of the Bank of Spain determines what is known as the “marginal propensity to consume”. That is, the desire that households have to spend when their income increases. Comparing the responses from 2018 with those from 2022, the institution’s economists detect that this marginal propensity to consume has fallen in general. This phenomenon “would have been more pronounced among higher-income households and those without home ownership,” he continues.

Family savings exceed historical levels

This trend can be verified in other statistics, such as the household savings rate in Spain, calculated by the INE. This indicator increased in the first half of this year until reaching 14% of their gross disposable income —in less technical terms: on average we have saved 1.4 euros of every 10 euros we have had to spend after paying taxes, including deposits or financial products considered on demand— . This level is a maximum not seen since the record of the first part of 2021 (18.9%), during the pandemic, when consumption options were very limited. Forecasts indicate that this savings rate will end the year at 13.3%, just over one point above the 2023 level (12%) and almost five points higher than the average between 1999 and 2019 (8, 7%).

This “conservative” or “cautious” behavior of families should change with the moderation of inflation — which, together with wage increases, entails recovery of purchasing capacity after the damage suffered between 2021 and 2023 —, with the strength of the market labor—in the third quarter a new record was reached with 21.8 million workers, which also increases the disposable income of families because more people work in each of them on average—and with the drops in interest rates . “It is of considerable interest,” admits the group of experts who signed the last “Observatory on the economic cycle in Spain” from the Fedea analysis center. “No one had foreseen it,” acknowledged Raymond Torres, the economic situation director, in the presentation of the updated Funcas forecasts in October.

The explanations for this propensity for families to save more than before the pandemic—and, therefore, to consume less—are forced to break with historical trends. “Current savings levels have only been observed in contexts of high uncertainty. “It is the first time that these levels have been seen in an environment of constant job creation,” says the BBVA Research economic projections report.

The International Monetary Fund (IMF) has also addressed this issue in its regional report on Europe: “Low consumer confidence and uncertainty about future shocks to their income have increased precautionary savings and, consequently, inflation rates.” Savings have remained above pre-pandemic levels. This has been added to the effects of high interest rates due to the monetary austerity of the European Central Bank (ECB).

Raymond Torres shares this reflection and gives another name to the IMF’s “precautionary savings”: “It is the trauma of the financial crisis, which we know in other countries like Japan left its mark on an entire generation.” According to this expert, “it is true that with high interest rates it is more interesting to save than in previous times, where saving was practically penalized. But the current behavior of savings goes beyond the traditional relationship with interest rates, because we are also seeing additional deleveraging. “Following the financial crisis, both households and businesses are tending to behave particularly cautiously in an uncertain environment.”

Those families that carry the “trauma” of the bursting of the real estate bubble, the euro crisis, the shock of the pandemic and, finally, the peak of inflation have among their worst nightmares the unbearable unemployment rates of just a decade ago or the drama of evictions due to non-payment of mortgages. A “trauma” that coincides with increasingly complicated access to housing. Meanwhile, the Bank of Spain adds one last reason: “The weight of households with heads of family of foreign nationality has increased by more than four percentage points in Spain since 2019. On average, these households save more than the rest (once taken into account the other main determinants of the savings rate)”, he concludes.