Employers and Tourists Prevented a Decline in Living Standards

The golden rule is that our savings should cover at least three months of expenses in case of any unexpected events in life, ideally six. Perhaps some managed to do this before the world was turned upside down by the pandemic and then the war. Both have merged into historically high inflation that devalues both current income and savings. However, current expenses are being managed without major upheavals for now. How? As statistics and the ‘grey’ zone show, literally from all sources – loans, savings, cards, higher wages, rent…

HNB’s analyses of loans and savings, from which conclusions could be drawn about whether citizens are financing increased costs with loans and savings, show that total loans to the population have accelerated growth in recent years, currently amounting to around seven percent. Although housing loans grew the fastest during the pandemic, this year it is non-purpose loans. The acceleration of cash non-purpose loans cannot be necessarily linked to the rise in prices of goods and services for current consumption.

Namely, cash loans are usually used to finance the purchase of durable goods, the arrangement and renovation of real estate, if the costs are below 40,000 euros, or for refinancing existing debt under more favorable conditions. However, as the acceleration of growth in cash non-purpose loans in the first half of 2023 coincided with the growth of real incomes and an improvement in consumer optimism, it is possible that it reflects a greater propensity to purchase durable goods rather than goods and services for current consumption.

When it comes to savings, the latest available data on disposable income and household savings is for 2021, so HNB internally estimates recent trends in savings. According to the latest estimates, the household savings rate fell during 2022 due to faster price growth than household incomes. Measured as a share of income, the household savings rate decreased last year from about 8.9 percent to about 3.2 percent.

At the beginning of 2023, there is a recorded increase in the average real net wage, which returned in the first quarter of 2023 to the level of the first quarter of 2022, and in the second quarter of 2023, it further increased – the increase in the average real net wage compared to the second quarter of 2022 is estimated at around 3.3 percent.

If real wages continue to grow, a gradual recovery in the savings rate could be recorded in the second half of 2023 – they estimate at HNB, adding that total deposits of the population decreased during the first six months of 2023 by 700 million euros. In the first quarter alone, a decline of 1.2 billion was recorded, mainly due to the issuance of government bonds (the issuance lasted from February 22 to March 1, with an allocated amount of 1.3 billion euros).

Rent from Tourism

Matija Kroflin, the Secretary-General of the Independent Union of Science and Higher Education, adds that both citizens and companies have, to some extent, reduced their debt or increased their savings during the pandemic because consumption and investments were postponed.

– Thus, reserves were created from which, upon the normalization of life, consumption was financed and new borrowing could begin. With the rising cost of living, more and more people will finance their basic needs through debt, so borrowing by citizens is likely to continue to grow. Interest rates are still relatively favorable and significantly lower than the rate at which average wages are currently rising. This process can continue as long as people have jobs, interest rates are relatively low, and wages are rising. If we enter stagflation, which will result in rising unemployment and rising interest rates, the mechanism for financing consumption through debt will break down.

As for wages, they are nominally rising due to a drastic shortage of labor in some areas of the economy. However, wage growth is quite uneven, and if we observe the rise in prices of basic products, food, and housing square meters, it is clear that everyone in this country who lives solely on wages is certainly feeling a drastic decline in purchasing power. Wage growth in some parts of the economy tries to keep up with the general price increase, but it fails to keep up with the rise in food prices anywhere. Tourism adds fuel to the fire – explains Kroflin. At the same time, he is aware that some citizens do not live on wages. There are incomes that go under the radar, primarily rent from tourism.

How and with what citizens finance the inflation-driven rising cost of living can be found out in the new issue of digital and printed Lider.