Earned incomes to make up for tapering state support - Capital Economics
Global Economics

Earned incomes to make up for tapering state support

Global Economics Update
Written by Gabriella Dickens

We expect household incomes to rise in most countries this year as easing restrictions allow people to get back to work. The outlook for incomes is brightest in North America, particularly given the likelihood of further fiscal transfers in the US. But even in Europe, government support will be tapered only gradually and seems likely to be extended if restrictions remain in place.

  • We expect household incomes to rise in most countries this year as easing restrictions allow people to get back to work. The outlook for incomes is brightest in North America, particularly given the likelihood of further fiscal transfers in the US. But even in Europe, government support will be tapered only gradually and seems likely to be extended if restrictions remain in place.
  • In 2020, differences in the rates of growth of real household incomes were largely determined by differences in government transfers. In European countries and Australia, there was a greater emphasis on maintaining employment rather than on supporting incomes directly. (See here.) In Europe, given that job retention schemes typically did not replace 100% of workers’ salaries, real incomes either stagnated or fell outright, even though unemployment barely rose. (See Chart 1.) But in Australia, stimulus payments to firms boosted the incomes of entrepreneurial households too, meaning that overall, real household incomes rose by nearly 6%. There was less emphasis on employment protection in the US and Canada and instead, governments aimed to support incomes directly and quickly by using stimulus cheques and/or by increasing unemployment benefits. As a result, incomes rose by 6% in the US and by 10% in Canada.
  • Fiscal transfers are set to differ across major DMs again in 2021. In the US, the further $900bn stimulus agreed at the end of last year includes an additional $600bn in stimulus cheques as well as an additional $300 boost to weekly unemployment benefits. In Canada, the federal government will continue to support those out of work with enhanced Employment Insurance. Meanwhile in Europe and Australia, government support is set to be tapered as job retention schemes are scaled back and eventually withdrawn. And in Japan, fiscal support, including direct transfers of ¥100,000 to every resident, expired in Q4 2020.
  • Nonetheless, we do not expect aggregate household incomes to fall this year in most DMs. (See Chart 1 again.) Our assumption that vaccine rollouts are successful should mean that COVID-19 restrictions start to lift during Q2 and that activity will rebound sharply in the second half of the year. In the US, Canada and Australia, this should mean that employment continues to rise steadily towards and even beyond, pre-virus levels. (See Chart 2.) In the UK and the euro-zone, measured employment will be relatively stable and may even fall as job retention schemes are phased out. But the drag on aggregate incomes should be at least partly offset by those who get back to work and therefore return to 100% of their salaries.
  • Prospects for consumption are arguably brightest in the US, Canada, Australia, and the UK. In the US and Australia, further rises in incomes in 2021 looks set to leave them 7% and 5% above their pre-virus levels, respectively. (See Chart 3.) Admittedly, in Canada, real incomes look set to fall this year. But that is largely due to the sheer scale of support in 2020. Our forecasts are for incomes to still be around 5.8% higher than they were pre-virus by the end of 2021. Since an abnormally high proportion of that income was saved in 2020, there is a lot of scope for spending to recover. We do not expect savings accumulated in the pandemic to be run down in 2021, but the upside risk is greatest in the US, the UK and Canada where the saving ratio rose most sharply. (See here.)
  • There is, of course, the risk that vaccine rollouts are slower than we are forecasting or that COVID-19 restrictions stay in place for longer. (See here.) But even then, we doubt household incomes would fall. In Europe, for instance, the scaling back of job retention schemes is predicated on a recovery in earned incomes insofar as politicians’ actions have convinced us that they will extend as necessary.
  • In terms of what all this means for consumption, following a decline of 6% in 2020, we expect growth in private consumption to average around 5.8% in DMs this year. The comparative resilience of household incomes in the US and Canada, and the relatively large increase in the UK this year, means that consumption will recover relatively strongly in these countries. (See Chart 4.) But with weaker incomes growth in Europe, the recovery in consumption there will lag other DMs, particularly in Italy and Spain where consumption is set to remain below its Q4 2019 level this year. Of course, if current restrictions are extended or if further lockdowns prove necessary, consumption will be weaker than we anticipate. But there is also a big upside risk if households decide to run down their savings by more than we expect.

Chart 1: Real Household Disposable Incomes (% y/y*)

Chart 2: Employment (Q4 2019 = 100)

Chart 3: Real Household Disposable Incomes
(% Difference from Q4 2019 v Q4 2021)

Chart 4: Real Private Consumption (% y/y)

Sources: Refinitiv, Capital Economics


Gabriella Dickens, Global Economist, gabriella.dickens@capitaleconomics.com