Standard Life Investments

Weekly Economic Briefing

Global Overview

Saving the world

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In the aftermath of the global financial crisis, global household saving rates increased dramatically, with more cautious behaviour a key feature of the subsequent recovery. However a decade on, do the recent widespread declines in saving rates signal greater confidence about the future? Theory tells us that saving decisions are in part based on rational expectations for future income streams. But that is not the whole picture. In practice, saving rates are influenced by many other factors as well. Households’ risk appetite and the relative importance of precautionary saving tend to fluctuate over time; with uncertainty shocks affecting spending decisions. Consumption patterns during and immediately after the financial and Eurozone crises provide powerful recent examples, though consumers’ reaction to the Brexit vote shows the relationship is far from unequivocal. Saving rates can be swayed by demographic change, as the lifecycle theory predicts that savings should be built up during people’s working lives and run down in retirement. As the advanced economies age we might therefore see saving rates trend down through this channel and indeed Japan, which is leading the world in the ageing process, does have one of the lowest in the world. Cohort and cultural attitudes to saving are also important in explaining cross-country saving patterns.

We also think it is important to consider how some of these factors interact with monetary policy. Lower interest rates and balance sheet expansion were supposed to support the post-crisis recovery by boosting household wealth, lowering debt servicing burdens and encouraging households to bring forward their spending from the future. But while these effects have been present, the transmission has been relatively weak. One explanation for this outcome is the burden imposed by lingering uncertainty, debt hangovers and households’ desire to repair their balance sheets, and credit constraints. It is only now that the scarring from the financial crisis is starting to fade, and these forces are becoming less binding, that spending is being freed up in some places. Declining saving rates over the past year have tended to be larger in those countries with the lowest debt burdens (see Chart 1).

Hangover fades