Does the Consensus Add Up?

Economic forecasters have been paring back their expectations for households' living standards for several months now. Soaring prices for energy and food combined with a fading impulse from COVID-related fiscal support together - more recently - with higher borrowing costs have severely derailed households' disposable income growth in most major economies. At the start of last year, the Blue Chip consensus of US forecasters was centred on an advance in real household incomes of 1.1% in 2022. In the latest survey from March this year those same forecasters are now expecting real incomes to plunge by 3.5% (see figures 1 and 2 below). Similar arithmetic applies to consensus forecasts elsewhere.

Figure 1: The evolution of consensus forecasts for 2022 for US consumption and real income growth

Figure 2: Average real disposable income growth in major economies

One of the key questions this begs is whether this squeeze on real incomes will meaningfully derail broader rates of economic growth. Current consensus forecasts for consumption growth suggest that it won't. In the US, for example, consumer spending volumes are still expected to advance by 3.2% in 2022. This isn't that much lower than the pace of 3.6% that was anticipated in January 2021, when household purchasing power was still expected to increase a little. The implication of this is that households are expected to fund the gap between their spending and their income by heavily drawing down their savings.

This is possible of course. Households in most major economies saved a much higher fraction of their incomes during the early phase of the COVID pandemic, causing household saving rates to climb to extraordinarily high levels. But over the last 12 months – as their living standards have been squeezed – household savings levels have been depleted. The upshot is that average household saving rates in the world's major economies have fallen back to much more normal levels (see figure 3 below).

Figure 3: Average personal saving rates in major economies

Against this backdrop moreover – as already noted above – central banks are actively lifting interest rates in order to cool economic growth to a more inflation-friendly pace (see figure 4 below). In theory these actions ought to cool asset prices and impair borrowing. But if that's right it will probably lift household saving rates at the same time. In short, there is some danger that consumption forecasts are out of kilter with real income forecasts and with interest rate forecasts. Indeed with the fiscal stance in most major economies in a tightening phase at the same time as all this (figure 5), the risk of a policy error is now rising to very uncomfortable levels.

Figure 4: Average short-term interest rate forecasts for 2022 in major economies

Figure 5: The fiscal stance in the major G20 economies is projected to get tighter

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.