Household saving is defined as the difference between a household’s disposable income and its expenditures on goods and services. During the pandemic it rose to historical highs everywhere.
Economists call it “wealth effect”: when people begin feeling a bit more rich, they start saving a bit less. Once the worst of the 2008-2009 global financial crisis was over, household savings ratios started falling gradually across all major economies. In countries like Portugal, New Zealand and Finland, growth in households’ spending often exceeded the growth of households’ income according to figures from the Organization for Economic Cooperation and Development (OECD).
The opposite, of course, is also true: when people believe themselves to be (or about to be) poorer, they save more. “Our desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future,” John Maynard Keynes wrote in 1937. How much we save, in other words, is an indication of how uncertain we feel about our financial outlook.
It is not difficult to guess how families and individuals felt during the Covid-19 pandemic.
Yet, compared to other recessionary periods of the past, the one we are hopefully leaving behind soon bears a major difference. Especially in the first half of 2020, savings rose to historical highs also because of the fewer spending opportunities available to households. When you can’t travel, when restaurants and entertainment venues are closed, when you spend most of your time at home in sweatpants, your chances to spend money become very narrow. When, on top of that, your job security might turn out to be not so secure after all, you rein in your spending even more. “With consumption constrained and uncertainty persisting, the surge in savings was a result of households’ involuntary (forced) and voluntary (precautionary) decisions,” analysts at Fitch Ratings wrote in a December’s research note. However, they added, it is widely expected that these high savings ratios will decline as consumption recovers. But that is not necessarily a bad thing.
Caution is needed when comparing household saving rates between nations: institutional differences and data reliability can thwart the international comparability of saving rates. Household saving rates also vary considerably across countries because of institutional, demographic and socioeconomic differences. Yet certain geographical distinctions have proven to be persistent over time.
What are the long-term enduring benefits for those countries where household savings keep steadily high irrespective of ever-changing levels of wealth, interest rates and other external factors? For one, these nations can be pointed out as an example of virtue to those with holes in their pockets. These nations and their citizens will be better prepared when unforeseen circumstances such as geopolitical tensions, pandemics, trade disputes, or prices and currency fluctuations arise.
In the wake of the European sovereign debt crisis, the implementation of austerity measures in those countries where unsound fiscal policies were considered the Achille’s heel of the Eurozone—Greece in particular, but also Italy, Spain and Portugal—was justified with the unavoidable necessity to reduce spending and increase savings. Germany—famously a country of savers—was a leading advocate of these policies.
The idea behind those measures was that good citizens and good states should not live beyond their means. The OECD data shows that, on average nationally, the most prudent households tend to save around 10% or more of their disposable income. These ratios are important in a larger sense: how much people tend to save also affects a country’s tax planning strategy and its welfare provisions and social policies. Long before Covid-19, industrialized nations in particular were already grappling with the massive strain put on their healthcare and retirement systems by their growing aging populations. These challenges have only become starker.
Yet, not everyone is born an economist, and individuals deserve a measure of indulgence if they are not always capable to manage their money well: a Cornell University’s 2018 study even suggests that we are wired to look for ways to earn money, but not so much for ways to save it. Reckless spending by governments is less excusable: all sorts of hazards known and unknown, as we have learned, can threaten without much warning the economic stability of a country.
Don’t spend more than you earn is a mantra that has always proven sound. Still, as a society, there is also such a thing as saving too much money. Economies rely on consumption to keep growth and progress going. What you don’t spend is what another doesn’t earn. Chances are that you are in the very same position in relation to someone else.
|Euro area (16 countries)||5.6||5.7||5.7||5.7||5.6||6.4||6.7||14.3|
Source: OECD Database (2013-2017) and OECD Economic Outlook, Volume 2020 Issue 2 (2018-2020)