Cost of living crisis drives household savings back to pre-pandemic levels

Challenges with inflation and the cost of living have driven household savings patterns back to pre-pandemic levels, said Bank of Ireland.

Bank of Ireland’s Savings and Investment Index for the second quarter shows that even though inflation has dropped from a high of 9.2 per cent in October last year to 6.6 per cent in May this year, it remains the number one concern for Irish consumers (32 per cent).

Concerns over the cost of housing and rent (19 per cent) also remain high, with the latest research revealing that the cumulative impact of inflation will continue to be an continual concern for households even if the headline rate looks likely to continue to drop.

The index tracks household attitudes towards savings and investment as well as monitoring their perspectives on the current and future savings and investment environment.

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Bank of Ireland chief investment strategist Kevin Quinn said 2023 has seen “a considerable shift” in attitudes to saving.

“During the pandemic people were saving almost a quarter of their income, and that pattern continued throughout 2022,” he said. “But this year, as the cost of living has become such a challenge for many households, savings levels have begun to revert to pre-pandemic norms.”

Habits

The bank said normalisation in savings habits was under way with the stock of savings having increased by €7.5 billion.

It said the survey shows household attitudes to the savings environment are changing rapidly this year.

The overall savings environment index dropped to a new low, as too did people’s attitude to whether it will be a good time to save in the coming six months.

This aligns with recently published CSO data showing that the amount being saved as a percentage of income in Ireland fell sharply in the first quarter, with Irish households now saving 14 per cent of their income compared to 24 per cent at end of 2022.

However, it is still higher than pre-pandemic levels (12.2 per cent in 2019) but the trend is clearly one of normalisation. This has happened as household consumption went up, while real income has dropped.

Regarding the investing environment, attitudes have remained steady with no overall change to the investment index for May. This comes on the back of solid gains in the equity and bond markets in the first half of 2023.

As of mid-June, global equity markets were up more than 9 per cent while global bond markets were up almost 2 per cent. Despite these gains, there remains an air of caution among households when it comes to investing, Bank of Ireland said.

Investment returns

“Our investments survey provides a mixed message,” said Mr Quinn. “On the surface, interest in investing has been steady in recent months, having dropped back from the highs reached in 2021.

“The year has seen strong returns from some of the big equity markets with 20-25 per cent returns in the main US and European indices since the low last September.

“We’ve also seen economies stay stronger than expected and company earnings, particularly in Europe, being a good deal better than anticipated.

“However, we’ve recently seen regional banking problems in the US and the debt ceiling negotiations create worries for investors.”

Mr Quinn said: “We’ve also seen markets face a tug of war between high but falling inflation and the continuing interest rate increases from central banks.”

“The fact that several major equity markets are now in a bull market is likely to see increased confidence among many would-be investors as they look to deploy their money in either regular investment or pension funds.”