Higher real income growth, reduced spending and precautionary savings contributed to significant increase in Irish household deposits during the pandemic

• Central Bank Economic Letter finds that, while household deposits increased across all euro-area countries during the pandemic, Irish deposit growth was among the highest, exceeded only by Baltic countries. Unlike Ireland, these countries had very high pre-pandemic deposit growth, marking the Irish experience as exceptional.
• While the virus and related restrictions reduced spending, a higher capacity to save through relatively higher real income growth may also explain the Irish performance. 
• Historical European analysis suggests that higher real income growth and periods of negative economic sentiment or uncertainty are also associated with an increase in deposits.
• Current higher costs of living could reduce Irish households’ future ability to save and reduce the existing deposit stock.  However, some households with disposable income or experiencing a growth in real income may choose to continue to save for precautionary reasons, given current heightened economic uncertainty.

The Central Bank has today (20 July 2022) published an Economic Letter, “The Future of Irish Household Deposits: A European Perspective” (PDF 637.84KB). The Letter is authored by Simone Saupe and Maria Woods. It examines some of the factors behind the significant increase in Irish household deposits during the pandemic and compares this with deposit trends in other euro-area countries during the same period. Using European data, the Letter also investigates the longer-run drivers of deposits before this exceptional period.

Understanding the factors influencing deposit growth is an important consideration for policymakers, particularly given the current environment of national and international economic uncertainty. Further, as deposits are a key source of bank funding, insights into deposit trends can have implications for financial stability.

The Irish household savings rate reached 25% in 2020, recording the highest annual increase across the euro area and compared with an average rate of around 10% in the prior three years. While the savings rate moderated in 2021, it continued to remain high. Much of these higher savings flowed into Irish household deposits held with banks and credit unions. Irish household deposit levels increased sharply over 2020 and 2021. This acceleration in Irish deposit growth peaked in February 2021 with an annual growth rate of 14%, which was more than three times the pre-pandemic average.

Looking at these trends more closely, the Letter finds that Irish households are heavily reliant on deposits, with relatively smaller participation rates in other financial assets. Further, this significant increase in deposit growth is evident across Europe. All euro-area countries recorded higher deposit growth relative to 2019, exceeding pre-pandemic averages. Irish household deposit growth was among the highest in the euro area, exceeded only by Lithuania, Latvia, and Estonia. However, each of these countries was already recording relatively high rates of deposit growth pre-pandemic.

Considering the potential factors influencing this trend, the Letter notes that a combination of reduced spending opportunities due to public health restrictions, together with elevated economic uncertainty, created both forced and precautionary savings in Ireland and across the euro area. The Letter also identifies real income growth as an important factor. In 2020, Ireland was among the countries that recorded both relatively higher real income growth and higher deposit growth. Historical European analysis on pre-pandemic data also suggests that real disposable income per capita is positively associated with future household deposit growth. Further, higher general policy uncertainty and a deterioration in unemployment expectations at country level are associated with higher deposits in the following quarter during crisis periods.  In addition, limited alternative household investments for high income is identified as a potential factor in deposit growth, as households may not be actively substituting across financial products.

The Letter notes that, as at mid-2022, higher costs of living are reducing real income in Ireland. Previous Central Bank research has identified (PDF 796.85KB) a link between higher expected inflation rates and lower expectations for real income. The Letter indicates that, if accompanied by lower economic growth in the near term, lower real income could reduce the existing deposit stock and constrain future savings capacity.  Currently, Irish deposit growth has eased back to 2019 rates. As at end-May 2022 however, total Irish household deposits of €144bn are 30% higher than at the onset of the pandemic. Had deposits continued to grow at 2019 rates over 2020 and 2021, total deposits would have been roughly €16bn less. However, some households with disposable income or experiencing a growth in real income may choose to continue to save for precautionary reasons, given current heightened economic uncertainty and limited alternative financial investment opportunities. The balance of liquidity needs versus precautionary motives will determine future household deposit growth highlighting the importance of future income growth and sentiment for deposit decisions.

Finally, the Letter finds a negative relationship between the old-age dependency ratio and future deposit growth. Ireland currently has a relatively young population, but the old-age dependency ratio is rising. The Letter therefore notes that longer-term structural changes, such as an aging population, could further reduce savings capacity.