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Conundrum for the Global Consumer: Save or Spend?

Nov 16, 2012

The global financial and economic downturn of 2008/2009 had major impacts on governments, businesses, and consumers around the world. Sharp declines in stock markets worldwide and the bursting of housing market bubbles in a number of countries had a particularly devastating impact on consumers, who saw significant declines in their net worth. Not surprisingly, consumers’ response to these events was to cut their consumption drastically; this dramatic cut in spending resulted in higher personal saving rates in many countries.

According to the OECD, most developed countries saw their household saving rates rise sharply during the slowdown, particularly those hardest hit by housing market collapses. Spain’s gross saving ratio jumped from 10.4% in 2007 to 18.5% in 2009, while the UK’s gross saving ratio soared from 2.7% to 7.8% over the same time period. The U.S. net household saving ratio more than doubled in one year, rising from 2.4% in 2007 to 5.4% in 2008, then fell back slightly to 4.7% in 2009. The most dramatic swing was in Ireland, where the saving rate went from -0.1% to 10.1% between 2007 and 2009 as the Irish banking crisis took its toll on the economy. French, German, and Italian households were already strong savers, and their saving ratios didn’t change dramatically (Italy’s actually fell). Although most countries have seen their savings rates retreat from those mid-crisis highs, for the most part, the saving ratios remain higher now than they were before the crisis.

What is the economic impact of higher consumer saving? The United States has long been criticized for having a perpetually low and continually falling saving rate; the annual saving rate reached a post-war low of 1.5% in 2005. Money saved by households is loaned out by banks, providing funding for domestic investment; without a sufficient domestic source of funds, a country must rely on externally-sourced capital. The U.S. is in the enviable position of having an unlimited supply of international creditors ready to provide funding; however, this reliance on foreign money can pose economic risks. Competition for scarce investment funds tends to push up domestic interest rates, and the repayment of the borrowed money and accrued interest takes money out of the domestic economy.

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The caveat here is that higher saving is actually the end result of reduced consumer spending, which in turn leads to lower GDP growth. So just when governments around the world are trying to stimulate economic growth, consumers are adjusting to their new, lower wealth levels by spending less. The question remains whether there has been a long term shift in consumer’s propensity to consume; the answer will have a decided impact on economic growth going forward.

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