On average, households in Slovakia have consumed almost all of their income, with the onset of higher inflation also reducing savings, according to Michal Marenčák, an expert analyst of econometric modelling at the National Bank of Slovakia. Nevertheless, despite record inflation, the real consumption of Slovak households will not fall by the end of 2022, quite the contrary, Marenčák pointed out. The amount of goods and services purchased by people grew, even though the incomes of the population stagnated after taking inflation into account.
Compared to the pre-pandemic period, people in Slovakia consumed fewer goods and services in volume terms only during pandemic lockdowns, but not during times of higher inflation from June 2021 onwards.
People were willing to put aside less of their income for consumption, which has steadily reduced the savings rate on household disposable income, according to the analyst. Consumer appetite resulted in a situation in the fourth quarter where the savings rate fell to 2%. "In other words, households consumed almost all of their income," Marenčák said.
Savings contributions can be simplistically divided into two groups, namely flexible and fixed. Fixed contributions can be defined as new contributions to a pension scheme and principal repayments on loans.
Flexible savings are the funds that people save at the end of each month after all bills and purchases have been paid. Today, according to Marenchak, positive contributions to savings are made up only of transfers to retirement plans and principal payments on loans. This is because the rest of the total income is no longer enough to finance consumption and the contributions of the flexible component are negative.
Pandemic savings have faded, according to the analyst. The volume of savings grew more during the pandemic. These are the so-called forced and precautionary savings that households built up when they could not buy established goods and services or because of concerns about the future. With the onset of higher inflation, these savings were reduced.
"The level of deposits has been below the long-term trend for several months now and people are unlikely to have the accumulated deposits anymore," Marenčák believes.
With debt service, i.e. interest and principal repayments, included, and little room remaining to further reduce savings, household consumption is likely to be weak in the period ahead, according to the analyst.
The volume of mortgages has grown significantly in recent years. Mortgage rates have also been rising since last year. Overall, therefore, people will increasingly put more money towards loan repayments.
Therefore, according to Marenčák, more significant growth in household consumption is likely to occur only after a sufficient and sustained acceleration of income growth above the rate of inflation. According to the estimates of the National Bank of Slovakia, this could come only in 2024, because households will have to renew their partially depleted financial reserves for some time.
Source: SITA
