European consumers are still being cautious with their spending, but the way they manage their finances is evolving. While savings rates remain high, there's a surprising shift towards investment funds and other market-linked products, which could have long-term implications for economic growth.
The Savings Conundrum
Europe's consumer problem persists, with savings rates inching down but still well above pre-pandemic levels. In the first quarter of 2026, for every €100 of disposable income, Europeans spent only €85.74 on goods and services, a slight increase from the previous year. However, the gross savings ratio of 14.26% remains significantly higher than the pre-Covid average of 12.5%.
This disparity between spending and saving is a drag on economic growth. In Europe, household spending typically accounts for over 50% of GDP. If the savings ratio were to fall to pre-Covid levels, it would imply an additional demand for goods and services equivalent to around 1-2% of GDP. But so far, there's been little progress in normalizing savings rates.
The Surprising Driver: Older Households and Wealth Erosion
One surprising factor is the behavior of older households. Research suggests that reduced inflation uncertainty leads to higher planned spending and lower savings. However, the real value of household wealth in Europe fell sharply between 2021 and 2023 due to high inflation. This erosion of wealth, especially among older age groups, has led to a more cautious approach to spending.
Older households, having accumulated more wealth, are more exposed to the impact of inflation on their purchasing power. As a result, they are more likely to postpone consumption to rebuild financial buffers. This behavior is particularly pronounced among those aged over 50, who have seen their wealth diminish during the pandemic.
The Opposing Forces: Younger Generations Stepping Up Precautionary Saving
On the other hand, younger generations are showing a different trend. Since the outbreak of the war in Iran, inflation expectations have risen across all age groups, but younger people are more inclined to say that now is a good time to save. This may reflect a more traditional response to higher uncertainty, with younger households building up cash reserves for precautionary reasons.
The data suggests that the slight dip in the savings ratio in the first quarter reflects two opposing forces: older households drawing down their reserves and younger households increasing precautionary saving. This has kept the aggregate savings ratio relatively stable.
The Coming Quarters: First Down, Then Up
In the second quarter, the savings ratio is likely to slip further as households tap their financial buffers to offset rising fuel costs. However, with fuel prices easing and geopolitical and labor market uncertainty still high, precautionary saving is expected to re-emerge as the dominant force in the coming quarters.
Mortgage dynamics will play a role in this shift. As mortgage rates rise and borrowing demand cools, slower mortgage borrowing will dampen housing-related spending and limit consumption growth. At the same time, faster mortgage repayments will lead to higher savings ratios.
What's New: Fewer Deposits, More Investments
Since the Covid pandemic, eurozone households have been channeling their savings into investment funds, insurance, pensions, and standardized guarantees. This shift is evident in financial transaction data, where net inflows into these assets have consistently outpaced those going into bank deposits.
Investment funds are gaining ground in the financial portfolios of households, with a significant increase in the share of liquid financial investments in total wealth. Between 2022 and 2025, liquid investments rose by the equivalent of 9% of GDP, while currency and deposits declined by almost 5%.
The Longer-Term Implications: Positive for Growth
If Europeans continue to allocate more of their savings to investment products, the need for precautionary buffers could gradually fade. As returns build wealth and offer stronger protection against inflation, households may feel less pressure to set aside a large share of income for financial security.
This shift could provide a lasting boost to domestic demand. Moves like Germany's pension reforms and the European Savings and Investment Union encourage households to hold a larger share of their wealth in investment products. However, we are not there yet, and the transition may take time.
In conclusion, while European consumers remain cautious, the way they manage their finances is evolving. The shift towards investment funds and other market-linked products could have significant implications for economic growth in the long term, potentially reducing the need for precautionary saving and boosting domestic demand.
