What happened to the post-COVID savings buffer?

Have you noticed that it has largely stopped talking about it in public communications? In this article, we highlight that calculations of excess saving buffer are illusionary.

We show that there is no longer an excess of liquid savings accumulated since COVID and explain why the Reserve Bank of Australia (RBA) should take a more pre-emptive approach to monetary policy and commence easing late-2024.

The RBA initially estimated that this excess savings buffer was $260 billion, then as time progressed the estimate was revised up to over $300 billion.

The RBA stopped providing a running total on the estimate some time ago which is probably sensible, given the imprecision in which it is measured. Nevertheless, it was always a simple calculation, and it is worth noting that on our estimates the accumulation of excess savings recently topped a massive $500 billion, or 32% of annual household disposable income.

Clearly, if households collectively decided to spend that excess savings Australia would have a massive consumption boom.

Spending $500 billion could sustain nominal private consumption growth at its 10-year average pace of 4.6% per annum for four years in the absence of any income growth. To be clear, that is not a forecast. Indeed, the purpose of this paper is to illustrate that liquid 'excess savings' are now exhausted and no longer available to smooth near-term consumption.

In many ways the initial observation is to ask the question as to why the stock of savings has not been dipped into much earlier and on much larger scale.

After all, what we can say empirically is that during periods of rising household wealth the household saving ratio normally declines and given the extent of cost-of-living pressures, it is entirely reasonable to have expected households to engage in consumption smoothing.