As American consumers become more active, European households are instead holding onto their wallets. Why is that the case?

Recently, the latest data released by the European Union's statistical office shows that in the second quarter of 2024, the household savings rate in the eurozone rose to 15.7%, reaching a three-year high and significantly higher than the pre-pandemic average of 12.3%.

While there is no direct comparability in overall savings rates, the trend in the United States is markedly different: consumption in the U.S. has played a role in fueling the economic rebound. Data indicates that the U.S. personal savings rate in the second quarter was 5.2%, lower than the average of 6.1% during the period from 2010 to 2019.

Andrew Kenningham, Chief European Economist at Capital Economics, believes that the increase in household savings in the eurozone stems from rising interest rates and low consumer confidence, but the trend of continuous growth in recent quarters is puzzling.

Kenningham stated in a report that since the pandemic, savings in Europe may have shifted to a permanently higher level, reflecting structural changes in the economy, "We believe that the savings rate will not drop significantly anytime soon."

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Why are EU consumers holding onto their wallets?

Data shows that the savings rate of European households is higher than the pre-pandemic level, which is a clear and persistent difference from the more active American consumers.

Previously, during the pandemic, savings rates on both sides of the Atlantic rose sharply as consumers stayed home more. However, after the pandemic, when Americans began to unleash their consumption potential, Europeans seemed to struggle with economic insecurity.

Data from the European Union's statistical office shows that in the second quarter of 2024, the household savings rate in the eurozone continued to grow, reaching 15.7%, up from 15.2% in the first quarter, due to a 0.8% increase in disposable total income, which grew faster than consumption (0.2%).

At the same time, in the second quarter of 2024, the household investment rate in the eurozone fell from 9.3% to 9.2%, due to a 0.6% decrease in the total amount of fixed capital formation.In the second quarter of 2024, the profit share of eurozone businesses (non-financial corporations) fell from 39.1% to 38.8%, due to the growth of employee compensation (wages and social contributions) plus taxes minus production subsidies increasing by 1.2%, which outpaced the growth of total value added (0.7%).

Mark Zandi, Chief Economist at Moody's Analytics, believes that the vibrant U.S. stock market and high housing prices have contributed to the growth of American household wealth. In contrast, in Europe, the less widespread base of stock ownership results in a smaller impetus from rising stock prices.

He added that European homeowners have more short-term mortgages, which encourages them to save more in anticipation of higher interest expenses on new housing loans, while many American homeowners have locked in record low rates through 15-year and 30-year fixed-rate mortgages.

"European consumers are just very cautious, while American consumers are more willing to spend, spend, spend," said Nathan Sheets, Chief Economist at Citibank in the U.S., who believes that "American households can be said to have always been in a situation where they feel more comfortable maintaining a relatively low savings rate."

Outside the eurozone, British consumers are also very cautious. Official data released this week shows that the UK household savings rate rose to a three-year high of 10% in the second quarter, still significantly higher than the average of 7.5% during the 2010-2019 period, despite some adjustments.

Simon MacAdam, an economist at Capital Economics, believes that the increase in European household wealth during the pandemic later evaporated.

He explained that European households have invested more in housing than before the pandemic, which has also raised the overall savings figures in the eurozone.

At the same time, geopolitical security factors may be one of the reasons for the cautious sentiment in Europe, as Europe is more dependent on energy supplies from the Middle East than the U.S. In addition, sluggish economic growth has also dampened people's morale, such as the recent poor economic data in Germany, the "economic locomotive" of the EU.

On October 7, the latest data released by the Federal Statistical Office of Germany showed that the decline in German industrial orders in August was much greater than expected, further indicating that the manufacturing industry of Europe's largest economy will not recover in the coming months.

Specifically, in August, after seasonal adjustment, the monthly rate of German manufacturing orders fell by 5.8%, while the market expected a decline of 2.0%. Various indicators suggest weak demand in the coming months.Last week, the German manufacturing PMI data revealed that due to a significant decline in output, new orders, and employment, German manufacturing shrank at its fastest pace in a year in September. Samy Chaar, Chief Economist at Lombard Odier bank, stated, "Europeans are saving more because they still lack a sense of security about the future, conflicts are imminent, and Germany is in a trough. For them, many things have changed, and not for the better."

Lilian, a seasoned business operator in Hamburg, Germany, who has been in commerce for many years, told Yicai Global that the European economy is currently in recession, with weak German consumption, and the prosperous days before the pandemic are long gone.

Lilian introduced that a once thriving department store in Hamburg has been demolished. In the days when the German economy was doing well, the building was packed with customers coming to buy luxury bags. However, according to her, a friend who used to represent first-line luxury bags there has now filed for bankruptcy.

The Organisation for Economic Co-operation and Development (OECD) predicts that, at least until next year, the unified household savings rate for Germany and the Eurozone, excluding capital investment, will remain higher than the pre-pandemic average and higher than that of the United States. The UK will also face a similar situation.

The Economic Outlook for the West and the East

In simple terms, the United States typically calculates its Gross Domestic Product (GDP) using four main components: personal consumption expenditure, business investment, government spending, and net exports. Among them, personal consumption expenditure usually accounts for nearly 70% of GDP, and retail and service industries are important components of the US economy.

Mazandi said that the decrease in the US savings rate helps to promote consumption expenditure, which has always been the main driving force behind US economic growth and an important reason why the US economy grows faster than the European economy. "American consumers have been driving the global economic train forward."

According to the latest OECD forecast, driven by strong household spending, the US GDP is expected to grow by 2.6% this year, while the Eurozone and the UK are expected to grow by only 0.7% and 1.1%, respectively.

On the 4th, the US Department of Labor released data showing that the number of new jobs in the non-agricultural sector in September was 254,000, higher than market expectations. At the same time, the unemployment rate decreased by 0.1 percentage points to 4.1%, a figure that has been declining for two consecutive months. The better-than-expected employment data in September indicates that the labor market remains strong, and the US economy still has resilience.Data from the U.S. Department of Commerce shows that U.S. retail sales in August increased by 0.1% month-on-month, lower than the 1.1% growth rate in July. The growth rate in July was the highest since January 2023. Xinhua News Agency, citing American media analysis, believes that the continued growth of retail sales in August compared to July indicates that U.S. consumers are still willing to consume under the current high-interest-rate conditions, which is "good news" for the U.S. economy. Experts predict that, given the recent decline in unemployment rates and the growth of retail sales, the Federal Reserve may cut interest rates by 25 basis points in September, instead of 50 basis points. At the same time, the Federal Reserve may continue to cut interest rates in November and December.

Innes McFee, Chief Global Economist at Oxford Economics, stated that after the turmoil following the pandemic, the global economy has returned to the low-growth trend of recent decades.

"We forecast a global average growth rate of 2.7% for this and next year," McFee explained, adding that our interpretation of the data is that the downside risks to the U.S. economic expansion have been exaggerated, and its economy has entered a growth rate more in line with the trend.

He also said, "Our indicators show that Europe's economic growth momentum is moderate, with growth rates consistent with the trend. The outlook for other regions varies greatly." For example, economies such as South Africa and Brazil are in an upward phase. In contrast, economies like Sweden and South Korea are still mired in a slump.