Consumption-to-income ratio at historic low due to uncertainty
Danmarks Nationalbank's new analysis reveals that the consumption-to-income ratio has reached a historically low level since 2019. This decline is driven by increased uncertainty and pessimistic expectations among households, particularly younger and older demographics, breaking with previous economic correlations.
A new consumption reality emerges
The consumption-to-income ratio in Denmark has fallen by almost 7 percentage points since 2019, stabilizing at a level not seen since the initial COVID-19 lockdown.
This trend is more pronounced in Denmark compared to other countries, despite similar global events.
The decline is primarily attributed to a shift in household behavior towards increased caution, coinciding with heightened uncertainty and pessimism about financial situations, even as disposable incomes have risen.
Younger households (under 40) contribute about a third of this decline, possibly due to long-term economic uncertainty.
Older households (over 60) account for half, as increased retirement age boosted income without a corresponding rise in consumption.
Households with ample liquidity have also reduced their spending proportion, including on non-durable goods like food.
Traditional factors like income and wealth distribution, and demographics, explain only a limited part of this development, pointing to new, complex drivers.
Four phases of cautious spending
Private consumption since 2019 has undergone four distinct phases.
The first, in 2020, saw a significant drop due to lockdowns, public relief packages, and a shift from services to durable goods.
The second phase involved a brief normalization post-pandemic.
The third phase, from 2022 through 2023, was marked by rising inflation and weak consumption growth, leading to the current low consumption ratio.
Since 2024, the ratio has stabilized at this subdued level.
These developments align with a negative consumer confidence indicator since early 2022, reflecting increased pessimism about both personal finances and the broader Danish economy.
This prolonged pessimism, exacerbated by global events like the corona pandemic, inflation fluctuations, and geopolitical tensions, has led households to increase savings and postpone consumption, a trend more pronounced in Denmark than in the euro area.
Beyond traditional economic models
This analysis underscores a critical disconnect between traditional economic indicators and actual household behavior.
The persistent low consumption ratio, despite rising incomes and wealth, challenges established macroeconomic models.
Policymakers must now contend with deeply ingrained uncertainty and pessimism as primary drivers, rather than solely focusing on income or wealth effects.
Understanding these new behavioral patterns is crucial for accurate economic projections and effective monetary policy in an increasingly volatile global landscape.