Household Saving Rates | Global Finance

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). The household savings rate 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. 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, savings rates are again projected to decline in some countries by 2011.

By Tina Aridas – Project Coordinator: Alessandro Magno

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

The two different measures countries employ make comparisons of savings rates between countries difficult. Further complicating the comparison is that various countries have different 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 within a country all affect savings rates within a particular country - and contribute to the difficulties in making one-to-one comparisons between countries. Nevertheless, household savings 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 savings rates over time in a particular country can translate into funds being available for this long-term growth.

In addition, higher levels of household savings allow a larger portion of a country’s overall debt to be financed internally. Analysts consider a high debt level primarily financed by domestic savings to be more easily sustained than high debt levels primarily financed by external (foreign) creditors. Indeed, Italy and Spain’s high debt levels in the current recession must be looked at through the lens of those countries’ higher rates of savings relative to countries such as the US and the UK, which have somewhat lower debt levels but also lower household savings rates. Japan’s very large debt burden has traditionally been financed by very strong household savings, but the country has seen a significant decline in savings 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 savings 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.

In 2007 and 2008, the European Union’s household saving rate was lower than in the euro area, due mainly to the low saving rates in the UK and the Baltic countries. The US saving rate was low compared with both the EU and the euro area.

Prior to the financial crisis of 2007-2008, saving rates saw an overall decline, with some countries experiencing a negative saving rate 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 in 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.

In the US, housing prices peaked in 2006, followed by declines of as much as 30% or more in some parts of the country, helping to push the country into recession. Other economies, too, had their housing bubbles burst as the global recession took hold.

Generally, households with higher incomes tend also to have higher savings rates. 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 savings 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.

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