A strong motivation to save but the French find it increasingly difficult to do so…
According to our BPCE-Audirep barometer survey, the French have a much more negative view of their financial situation than in February 2019 during the so-called ‘Yellow Vests’ crisis, and two-thirds of them expect the future rate of inflation to rise still further. It is hardly surprising, therefore, that the size of the inflationary shock to purchasing power and the recent rallying of the middle classes to the pessimistic view held by lower income groups is leading respectively 80% and 58% of the French middle class and lower income groups to cut back on, or even eliminate, certain types of consumer spending. They display a more ambivalent relationship with savings, however. Rising prices have become one of the main reasons for saving and the desire to put money aside remains at one of its highest levels, all the more so as the propensity to save is also being driven by long-term considerations (retirement, rising public debt, etc.) yet, at the same time, never since the beginning of 2019 have the French been so pessimistic about their ability to save, especially people belonging to the lower income groups.
Fear of inflation? Yes, but not only...
In an economic environment marked by the threat of stagflation – a situation characterized simultaneously by a significant decline in economic output, a durably higher rate of inflation, and a corresponding rise in interest rates following the shift in the FED's monetary policy and the ECB's more tardy normalization of interest rates – it is possible that French GDP growth will not rise above 2.1% in 2022 before dropping to 0.8% in 2023. It is expected that average inflation will be close to 5.6% in 2022 and 3.4% in 2023. According to this scenario, the French savings rate should remain close to 16.2% in 2022 before falling to 15.8% in 2023 after standing at 18.7% in 2021 and 21% in 2020. However, the savings rate is not expected to return rapidly to its pre-Covid level of 15% owing to the more uncertain outlook and soaring inflation, and despite the excess savings built up during the pandemic and fewer worries about unemployment. It is true that the recent rise in the savings rate has chiefly been driven by affluent households whose propensity to consume is lower than the average. Insufficient returns on investment – especially if higher inflation erodes the real value of their financial assets – will encourage them to maintain high savings rates… all the more so as these affluent individuals anticipate future tax hikes in response to the deterioration in public finances.
Measured in terms of surpluses (flows excluding interest and capitalization of interest), financial investments – which reached an absolute record of €149.3 billion in 2020 – are expected to continue their gradual slide from €111 billion in 2021 to €89.6 billion in 2022 before heading toward €66.7 billion in 2023 owing, firstly, to the decline and subsequent weakness of household purchasing power and, secondly, to the anticipated slower distribution of new real estate loans, expected to be more marked in 2023. These levels – which remain very high compared to a normal situation – can be explained by real cash flow behavior in response to changes in inflation rates and by the anticipation of higher taxation given the amount of uncertainty and weariness induced by the constant onslaught of the rapid succession of crises. This outlook consequently assumes that the excess savings accumulated in 2020 and 2021 will not only continue to build up in 2022 (albeit at a slower pace) but also remain unspent in 2022 and 2023.
Investments and arbitrage: the French left perplexed by the ongoing upheavals
With regard to arbitrage operations, the sensitivity to the recent increase in the Livret A rate (increase from 0.5% to 1% on February 1) appears to have been significantly disrupted and reduced by the notably sharp rise in inflation with the instantaneous real return (excluding inflation) becoming deeply negative (less than -4%). The BPCE-Audirep barometer survey conducted in June 2022 reveals that savers are left perplexed by the fact that most of them find it impossible to determine, in an inflationary market, how attractive the different products actually are. They have lost their bearings in an environment distorted by the resurgence of inflation and by the still limited increase in regulated interest rates that, at 1%, still remain far from the psychological threshold (which is close to 2.5%) likely to trigger major arbitrages.
It therefore seems highly likely that the impact of interest rate increases will not be linear but will rise as the increases draw closer to the 2.5% threshold. For example, the test carried out in June in the BPCE-Audirep barometer survey to ascertain how savers would react to the possible increase in the regulated interest rate from 1% to 1.5% confirms a much higher degree of sensitivity than for the previous increase of 0.5% (46% of savers would consider switching to passbook savings accounts vs. 31% in February for the increase from 0.5% to 1%).
New savings boosted by passbook savings accounts, notably by the increase in interest earned on LEP accounts
As a result, the favorable impact of the 0.5% rate increase on Livret A passbook savings accounts has been considerably lower over the past few months than in previous periods: over 6 months (all other things being equal), it would have amounted to €4.2 billion instead of the €8.4 billion estimated by our econometric models. What is more, the positive impact of the increase in the Livret d’Epargne Populaire (LEP) interest rate – up to 2.2% vs. 1% for the Livret A – which can be estimated at €3 billion of additional inflows, most likely came into competition with the first impact on the Livret A and LDDS Sustainable Development and Solidarity savings accounts for low-income customers while distorting the hierarchy of returns in the minds of households. What is more, there may exist a form of saturation of the ceilings of the Livret A and LDDS savings accounts for the most affluent households, ceilings that mechanically limit new savings inflows for these products. On the other hand (and despite the fact that the LEP investment ceiling is frequently reached), the number of account holders – currently standing at almost 7 million – provides significant room for growth considering that it remains well below the total number of potential beneficiaries (nearly 15 million) according to the 2021 report published by the Observatoire de l'Epargne Réglementée (‘Observatory of Regulated Savings’).
Although arbitrage operations typically expected from the increase in the Livret A rate have also been modified regarding the Livret B-CSL savings account, the PEL home saving plans, and life insurance, arbitrage has remained relatively consistent for sight deposits (-€3.2 billion). It is therefore likely that regulated passbook accounts have greatly benefited from the accelerating trend of outflows from PEL plans (-€0.8 billion), whose latest generation earns a lower rate of interest net of tax (0.7%) than the Livret A (1%). Ordinary passbook savings accounts (-€4 billion) seem to be suffering from their near-zero rate of return and the failure to provide an enhanced competing offer of ordinary accounts of this type. Conversely, life insurance products have been little affected by the negative impact typically observed on euro-denominated products in the wake of an increase in regulated rates.
A significant impact on life insurance and unit-linked policies
Life insurance chiefly benefits from the dynamism of unit-linked products, whose momentum is also driven by retirement savings plans (plans d’épargne retraite or PERs). The success of PERs is largely attributable to the products distributed by insurers. At a time when the public is expressing considerable interest in preparing for retirement – an interest currently reinforced by the lack of visibility about the French government's pension reform plan – new net inflows, excluding transfers to insurers' PER plans, have represented over the past year the equivalent of 28% of net life insurance inflows. What is more, unit-linked products have also benefited from a limited yet gradual decline in risk aversion in an economic environment generally considered unfavorable for the stock market, leading to a shift in flows from securities to unit-linked life insurance products over the past 18 months.
We can therefore expect that arbitrage between financial products – still characterized by a wait-and-see attitude, a preference for security and the ready availability of the funds invested at the expense of risk – will be disrupted by the scale of the sudden changes in regulated rates in 2022 and, a fortiori, in 2023, not to mention the effect of the surge in inflation, already observed by households, on both Livret A and especially LEP savings accounts. The closer regulated rates approach, or exceed, the psychological threshold of approximately 2.5%, the stronger the shifts towards these products will be, with significant risks of difficult-to-measure supply effects on LEP savings accounts, via new account openings, or on taxed passbook savings accounts, money market funds and bonds, via a revival of supply buoyed up by the rise in interest rates. It can be expected that these supply effects will have a negative impact on non-interest-bearing sight deposit accounts in addition to PELs and euro-denominated life insurance products, whose returns are likely to remain less responsive. In particular, new inflows of deposits on LEP accounts could even exceed the forecast (€7.2 billion in 2022) as the anticipated successive returns, which are well above the psychological thresholds for remuneration, are all the more likely to produce non-linear effects as the clientele eligible for these accounts is twice as large as the number of current LEP account holders, and the average amount of deposits on LEP accounts is high (€5,600). We also expect to see a gradual shift away from the most liquid and immediately available compartments towards investments whose returns provide savers with an initial protection against inflation thanks to the successive increases in regulated rates.