French households: continued oversaving and new motivations
Although France is likely to enjoy an apparently spectacular 6.8% rebound in economic activity in 2021, this impressive rate of growth is merely the mirror image of the historic 8% collapse in wealth triggered in 2020 by the ‘administered’ halt in production activities following the advent of the Covid-19 pandemic and the adoption of strict lockdown measures. While the French economy returned to its pre-crisis level in September 2021 – notably thanks to progress in vaccination and the exceptional support provided by the ‘whatever it takes’ monetary and budgetary policies – consumer spending still remains 0.9 percentage points below its end-2019 level.
As after most large-scale crises, household savings are only very slowly returning to more normal levels. After two exceptional years (with a household savings rate of 21.4% and 19.3% in 2020 and 2021 respectively), savings are only expected to return closer to their pre-crisis level in 2022, albeit at the higher level of 15.7%. The result of these trends is that it seems unlikely at this stage that the excess savings built up during the crisis will fuel growth through an increase in consumer spending in the coming months.
Changes in lifestyle
The propensity to save remains strong despite the abatement since the month of June of fears about future unemployment trends. Rising prices and related anxiety about purchasing power – exacerbated by the realization that the crisis will not be over any time soon and that it will call for significant changes in our lifestyles (a widely shared perception even before the announcement of the fifth wave of the pandemic) – have combined to depress people’s long-term expectations even further, notably as far as the retirement pensions are concerned. In addition to widespread caution about the future, people seem to be finding ever more reasons to put money aside: rising prices, the increase in public debt (a cause of concern for 62% of the French) along with the anticipation of economic difficulties in the future. The recent rise in the savings rate is driven in particular by wealthy households, whose propensity to consume is naturally lower than the average. This social category is sensitive to the destabilizing impact of persistently low nominal and real interest rates. This concern seems to be driving their desire to continue building up their savings, possibly in response to worries about retirement, to make up for inadequate returns on investment especially if higher inflation (which stood at an annual rate of 2.8% in November 2021) begins to erode their real cash holdings. Retirees, for their part, are more likely to fear the effects of rising prices and to anticipate foreseeable tax increases in the face of runaway government debt.
No rapid return to the pre-crisis situation
The continued pursuit of caution was notable throughout the first three quarters of 2021 with a surplus of financial investments (compared to the pre-crisis situation) of €4.9bn per month (financial flows excluding interest and market capitalization) vs. €8.2bn between March and December 2020. As a result, total aggregate flows (excluding securities) reached €100.3bn in September 2021, only 6.6% lower than during the same period in 2020.
The balance sheet projection for the end of 2021 clearly shows the absence of a rapid return to the pre-crisis status quo. It is true that this reflects the impact of an atypical crisis but it is also the expression of the inertia of typical ‘anchoring’ effects after a shock of this kind. Household financial investments could therefore reach €110.2bn in 2021 versus €141bn in 2020 and €74.4bn in 2019, i.e. a surplus in excess of €130bn over two years compared to a more ‘normal’ situation.
From sight deposits to retirement savings, an autopsy of a large discrepancy in financial investments
The principal objectives in savings remain liquidity and security, signs of typical precautionary savings behavior. Sight deposits and passbook savings accounts are expected to record annual inflows of close to €56bn and €50bn respectively: levels sharply down, however, compared with 2020. The relative decline in sight deposits and passbook savings accounts, as well as the faster decline in regulated home savings plans, can partly be explained by the sharp recovery in life insurance driven by exceptional inflows into unit-linked products (whose share of total assets has risen from 21% to 27% since March 2020) and by smaller outflows from euro-denominated products.
Savers are reacting with greater objectivity
Sight deposits, however, have seen historically high flows, belying the theory that the accumulated total of excess savings is being spent. The attitude taken by French households regarding their flows of surplus savings remains dominated by the desire to invest them in other assets, or simply to leave them in current accounts, for a number of reasons which – in addition to the traditional attraction of enjoying access to available funds and the desire to prepare for personal projects – are related to the fact that the investment ceilings on passbook savings accounts have been reached or that the return on alternative investments is too low. When asked about the level of interest rates that would make them opt for other investment vehicles, savers seem to maintain benchmarks similar to those prevailing in 2018 with a median arbitrage rate of 2.9%.
Savers, however, seem to be reacting with greater objectivity. An estimate based on econometric models was drawn up for 2022 in the event that the interest rate paid on Livret A passbook savings accounts should be increased to 0.8% in February next year, to reflect the higher rate of inflation. This eminently political decision – which also carries the significant risk of generating violent arbitrages between assets and harming the financing of social housing – would (all other things being equal) have a very positive impact on the aggregate total of passbook savings accounts (+€11.2 billion), including Livret A savings accounts (+€4.2 billion), and would do so more at the expense of life insurance (with outflows of €6.5 billion) than at the expense of sight deposits (outflows of €3.8 billion) and even term accounts (outflows of €0.9 billion).
As far as securities are concerned, we seem to be witnessing the gradual end of opportunistic behavior with a decrease in net flows into listed equities and significant outflows from non-money market funds due to the reduction in quick & easy gains with rising prices. Overall, negative flows on mutual funds and bonds should bring outflows on securities back to levels close to those observed in 2018-2019, of approximately -€10bn.
Unprecedented momentum in individual retirement savings
Long-term oriented investments are consequently dominated by unit-linked life insurance products but also by the confirmed emergence of a lasting appeal for retirement savings vehicles, of which about 50% of their funds are also invested in unit-linked products and contribute to their success. The creation of the so-called PER retirement savings plan seems likely to bring about lasting changes in the retirement savings market above and beyond the traditional success enjoyed by a new financial product at its launch. While individual retirement savings were the poor relation of this market, they have benefited from unprecedented momentum over the past two years: new deposits in 2021 are expected to reach €5 billion, compared to an average trend of around €1.2 billion per year for individual enrollment products, and 900,000 new contracts (excluding transfers) have already been signed compared to 2.8 million contracts at the end of 2019, a figure that has been declining over the past three years. This success seems to be confirmed by the high level of intentions to sign up for these products (23% of people who have not yet taken out one of these plans), particularly among people aged 35-49 but also among people in the 18-35 age bracket, very concerned about the size of their future pensions when they retire. In the private sector intentions to sign up to group retirement plans are even more pronounced with 35% of people expressing interest… but the market seems to be faced above all with a challenge regarding the visibility and availability of the savings plans: only 13% of private sector employees think that their company offers a collective PER and 8% “that it is expected to offer it soon,” while 30% “don't know” whether the scheme already exists in their company or not. After several decades of slow growth and a very partial success in meeting expectations, retirement savings seem poised to play a significant role in households’ asset choices which, given the management horizons of these funds, should have a very favorable impact on banks’ ability to finance the economy.