From one crisis to another at a dizzying pace

Crises are chaining together at a dizzying pace —the conflict in the Middle East being the most recent avatar— and uncertainty seems to have permanently settled in the economic landscape. Proof of this is the change in behavior of families and businesses towards greater caution in their spending and investment decisions.

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Across the European Union, a growing propensity for private sector saving is detected (Ireland, whose statistics are altered by the payment flows of large corporations, is the only exception). In the last three years, European households allocated almost 15% of their disposable income to savings, on average, two points above usual values. And in Spain, the savings rate has doubled.

Such frugality has no easy explanation. Factors such as interest rates —which, when rising, increase the profitability of savings— have influenced, but only marginally. In our country, the most common financial assets offer a lower return than in other European countries. Uncertainty is the dominant trend, also contributing to the gap between the economic situation and its social perception.

Similarly, companies are reluctant to invest all their surpluses, as would be expected, particularly in an expansive cycle like the one that has prevailed until recently. They prefer to accumulate liquidity in bank accounts, buy financial assets, or reduce debt, so that, in the last three years, European non-financial corporations have allocated 8.5% of profits to these operations. In Spain, the surplus reaches 11%, which highlights the same cautious attitude as households.

In short, the private sector is making its own interpretation of the international economic fluctuations, based on the realization of the limited room for maneuver of states to address short-term challenges. They prefer to secure a liquidity cushion, even when the economy is doing well, so as not to be overly exposed to the next crisis.

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This private savings shock has relevant implications for economic policy. In the immediate term, a part of the citizenry has the capacity to adjust to the rise in energy prices brought about by the Iran war. It is therefore possible not to extend the generalized cut in hydrocarbon taxes beyond June, which is the period foreseen by the Government for this measure to remain in force, while maintaining support for vulnerable sectors: the effects on consumption of the elimination of indiscriminate subsidies, which are also the most costly for public finances, would be reduced.

On the other hand, it is important for states to support the economy in times of cyclical weakening, avoiding past mistakes. But, in our case, although we are facing a slowdown due to the aftermath of the war, growth should still exceed 2% this year, without the need to resort to measures that seriously alter the path of correction of budgetary imbalances. It is indeed advisable to maintain room for action in the face of future disturbances and not expose ourselves to risks that would pressure a risk premium which, for now, remains at favorable levels.

Citizens seem aware of the limited capacity of states to isolate their economies from geopolitical shocks. To be credible, the response must be aimed at structurally reducing energy and technological vulnerabilities, in cooperation with European partners. The expansion of renewable energies is an example of the right direction. Although the task is complex and short-termism is always tempting, a long-term vision policy is the best way to reduce excessive precautionary savings and unlock productive investment, key for sustained growth.