One of the likely outcomes of this crisis is that savings rates will increase, both for the non-financial corporate sector and for households. While higher levels of savings necessarily correlate with allowing the government sector to run budget deficits as the private sector retrenches, over the longer term, private sector savings are likely to remain relatively high—likely resulting in lower interest rates and slower economic growth. Similarly, equity risk premiums are likely to remain elevated, representing an opportunity for longer-term investors.
In this Economics Weekly, we look at the household savings rates during past recessions and recoveries, as well as the equity risk premium and what the potential outcomes could be this time around.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.