Author: Tina Aridas, Valentina Pasquali
Project Coordinator: Denise Bedell

Household saving is defined as the difference between a household’s disposable income (mainly wages received, revenue of the self-employed and net property income) and its consumption (expenditures on goods and services.) Since the early-to-mid-1990s, savings rates have been stable in some countries but have declined in others - in some cases sharply, including in Australia, Canada, Japan, Hungary, South Korea, the United Kingdom and the United States. With the great recession of 2007-2008 that trend reversed itself, and household saving rates increased in 2009 in many countries. However, in 2010 they started declining once again in a number of places and are projected to continue to do so through 2013.

Data is from the OECD, Economic Outlook n.91, June 2012.

Household Saving Rates (forecasts as of June 2012)

The household saving rates is calculated by dividing household savings by household disposable income. A negative savings rate indicates that a household spends more than it receives as regular income and finances some of the expenditure through credit (increasing debt,) through gains arising from the sale of assets (financial or non-financial,) or by running down cash and deposits. Nations aggregate this data and report it on a regular basis.

Household saving rates can be measured on either a net or a gross basis. The net saving rates takes into consideration depreciation, and is the figure most commonly used. The figures presented here are primarily net saving rates, with indications where gross saving rates are used because net saving figures were unavailable.

The use of two different measures makes comparisons of saving rates between countries difficult. Further complicating the matter is that countries have various social security and pension schemes, and different tax systems, all of which have an affect on disposable income. In addition, the age of a country’s population, the availability and ease of credit, the overall wealth, and cultural and social factors all affect saving rates - and contribute to the difficulties in making one-to-one comparisons between countries. Nevertheless, household saving rates are a good indicator of a particular country’s income versus consumption over time.

Long-term economic growth requires capital investment – in infrastructure, education and technology, for example, as well as in factories, business expansion, and so forth – and the main domestic source of funds for capital investment is household savings. Consistently high saving rates over time in a country can translate into funds being available for growth.

In addition, higher levels of household savings allow a larger portion of a country’s overall debt to be financed internally . Analysts consider this to be more sustainable option than high debt levels primarily financed by external (foreign) creditors. Italy and Spain’s high debt levels must be looked at through the lens of their higher rates of savings. Countries such as the US and the UK, which have somewhat lower debt levels, also have lower household saving rates. Very strong household savings have traditionally financed Japan’s very large debt burden, but the country has seen a significant decline in saving rates over the past decade.

On the other hand, domestic consumption (money that could otherwise be put into savings) adds to GDP growth, which is an important factor in an economic recovery. In the wake of the financial crisis, there is some risk that the paying down of excess debt via increased savings could be a drag on consumption and banking lending in the future, with a dampening effect on economic recovery. Thus rapidly increased saving rates and lower domestic consumption could result in a larger share of future GDP growth needing to come from business investment, net exports and government spending.

Prior to the financial crisis of 2007-2008, saving rates saw an overall decline, with some countries experiencing a negative saving rates along with increasing household debt. A combination of factors fueled an increase in household borrowing and, concurrently, a decrease in household savings - including low interest rates, lax lending standards, availability of exotic mortgage products and growth of a global market for securitized loans. In many countries, house prices reached historic levels as new and/or speculative homebuyers used easy credit to purchase properties. In the US, for example, household debt, as measured by the ratio of debt to personal disposable income, was more than 130% by 2007. The US was not alone in having a housing bubble and the resulting decline in household savings. Other countries - particularly the United Kingdom, Poland, Hungary and South Korea - also experienced housing bubbles over the same period, along with decreased savings.

Generally, households with higher incomes tend also to have higher savings rates. At the same time, households with higher “perceived wealth” tend to spend more of their disposable income and, therefore, have lower savings rates (a phenomenon known as the “wealth effect”). For example, prior to the financial crisis, households’ “perceived wealth” increased due to inflated real estate values – the inflated values of their homes added to their perception that they were, in fact, wealthy – and the (perceived) need for savings shrank. In the aftermath of the crisis, many countries experienced rising saving rates – in the UK, Canada, the US, Germany, and elsewhere. This is partly due to this “wealth effect.” As the recession hit the value of residential homes and 401(k)s – a main source of wealth for many families – households perceived themselves as being less wealthy, which translated into increased savings. Rising unemployment, too, can increase savings as households spend less on discretionary consumer items.

Some economists believe that the recession has structurally changed the pattern of consumption/savings that could last for years; others believe that an upturn in employment, a re-relaxation of credit availability and a bottoming of the housing market could re-start the spending trend.

In 2011 the highest household saving rates, above 11%, were found in Belgium, Germany, Switzerland, France and Spain (the latter two use the gross measure.) The lowest rates, below 2%, were found in Estonia, New Zealand and Denmark. Denmark is the only country with consistently negative household saving rates from 2006 to 2013 (projected.) Rates in the US reached a high of 5.4% in 2008 as American households were experiencing some of the worst moments of the crisis and trying to pay down their debt, but started declining again in 2011 and are projected to fall back to around 4% by 2013.

Data is from the OECD, Economic Outlook n.91, June 2012.

Household Saving Rates (forecasts as of June 2012)

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