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Conundrum For The Global Consumer: Save Or Spend?
Perspective | 23 November 2012
By FactSet

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 percent in 2007 to 18.5 percent in 2009, while the UK’s gross saving ratio soared from 2.7 percent to 7.8 percent over the same time period.

The US net household saving ratio more than doubled in one year, rising from 2.4 percent in 2007 to 5.4 percent in 2008, then fell back slightly to 4.7 percent in 2009. The most dramatic swing was in Ireland, where the saving rate went from -0.1 percent to 10.1 percent 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 did not 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.

Sources: OECD Outlook, US Bureau of Economic Analysis
*Gross saving of households and NPISHs
** Net saving of households

What is the economic impact of higher consumer saving? The US has long been criticised for having a perpetually low and continually falling saving rate; the annual saving rate reached a post-war low of 1.5 percent 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 US 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.

The caveat here is that higher saving is actually the end result of reduced consumer spending, which in turn leads to lower gross domestic product 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.

FactSet Research Systems is a leading provider of financial information and analytic applications to investment professionals around the globe. FactSet was founded in 1978 and is based in Norwalk, Connecticut, with operations in 23 locations worldwide. To learn more, visit www.factset.com.

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