A Closer Look at the Global Savings Trend

We believe the slowdown in global economic growth can be partially attributed to the weak aggregate demand due to savings glut and excess capacity. We took a closer look at trends in the global savings rates across multiple regions and countries and how those rates convert and fluctuate across these three sub-sectors: government, corporations and households.

There are many variables that can drive a country's savings rate within these three sub-sectors:

• Per capita gross domestic product (GDP), which shows the developmental stage of a country and indicates national income and the wealth level of that country.
• Similarly, GDP growth is correlated with the savings rate; all else equal, the higher the GDP growth, the higher the income, and hence a higher savings rate.
• The dependency ratio represents the demographic structure and reflects the level of aging within a population.
• Real interest rates, which drive the substitution effect; a higher rate means a higher return on investment, which may discourage saving.
• The inflation rate has an effect on savings. A deflationary environment may trigger more saving and less consumption, and hence less aggregate demand, which should reduce inflationary pressure.
• Cultural and social safety nets can also drive the savings rate. Better social safety nets can lead to less household savings.

While it's hard to make generalizations on a high level and on an isolated basis by just looking at a country's national savings rate, there are some overall trends that provide information and have investment implications. We will look at the general trend of national savings rates on a regional level within Asia, Europe, Latin America (Latam), and then the savings rates within each of the three sub-sectors—government, corporate, and household—for a small selection of sample countries. Ultimately, we want to know whether central bankers recognize the implications of their respective monetary policies on national and global savings rates. Unsurprisingly, we believe the G3 central banks have the largest influence over global trends in savings.

Savings rates on a regional level: By comparing national savings trends in different geographic regions, the countries within a region do share similar trends. The four charts below display the national savings rates as % of GDP in Asia, Europe, Latam and other countries. Asian countries as a whole are on a slight uptrend in national savings rates, but peaked either in 2007-2008 or 2010 (see Chart 1).

Asia

• The Philippines, China, and Singapore have the highest savings rates, ranging from 45-49%, whereas the savings rates for all other Asian countries clusters around 28-35%. Almost all Asian countries experienced a secular increase in savings rates from the 1990s to the present, exemplified by the Philippines, which enjoyed the fastest increase in savings from 20-45%, even though the country experienced somewhat of a down trend since 2011. Japan has the lowest national savings rate in Asia of 22%.
• Commodity producers like Malaysia and Indonesia went through a decline in savings rate that peak in 2008 and 2010 respectively. Malaysia's decline in savings rate is driven by the collapse in its terms of trade and drop in current account balance and foreign reserves.

Europe

• There is a distinct difference within two continental groups: Northern European countries like Norway, Switzerland, Sweden, and the Netherlands have high national savings, ranging from 30-38%, followed by Germany, the Czech Republic, Hungary, and Ireland (see Chart 2). France stands out with its downtrend and low savings rate at 20%.
• Peripheral countries like Spain, Italy, and Portugal have lower savings rates, ranging from 15-22%. Portugal has the lowest savings rate at 14%. However, the savings rate in peripheral countries has been on an uptrend despite the European Central Bank's (ECB's) efforts to stoke bank lending and eurozone inflation.
• Savings rates for most European countries peaked in either 2006 or 2007, bottomed in 2009-2010, and have been on a slight uptrend since then.

Latam

• Most Latam countries are middle-income commodity producers (see Chart 3), except for Mexico, which can be categorized as a manufacturer. Peru, Mexico, and Chile have higher savings rates than Brazil and Argentina.
• These Latam countries mostly follow the CRB index, oil and copper index, which peaked once in 2007 and in 2011 (see Chart 4).

Other Countries

• We put Australia, New Zealand, South Africa, Russia, and Turkey into "other countries" as shown below in Chart 5. The savings rate in Russia and Australia show some correlation with the commodity boom and bust cycle; however, Australia has much less beta than Russia due to its status as a developed market country.
• The savings rates in Turkey and South Africa are in a secular decline.

How do these variables drive the savings rate in various countries?

Inflation versus the Savings Rate

Chart 6 features the Consumer Price Index (CPI) on the x-axis and Producer Price Index (PPI) on y-axis for each country. You can see countries with higher inflation rates like Argentina, Brazil, South Africa, Turkey, Russia, Indonesia, and India are countries which have lower savings in their specific region. This is intuitive as higher inflation discourages savings, and instead encourages consumption and spending, and in turn leads to lower savings rates. However, there are some exceptions; peripheral European economies like those of Portugal, Italy, and Spain are in a state of disinflation and yet also have comparatively lower savings rates. One of the factors affecting these peripheral European countries is a lack of independent monetary policy and the ECB's unified loose monetary policy discourages savings. According to Chart 6, most other developed countries cluster around deflationary zone.

Real Interest Rates versus Savings Rates

Chart 7 below maps the real long-term rate on the y-axis and the real short-term rate on the x-axis for each country. Countries with high inflation rates—Brazil, Indonesia, India, Mexico, South Africa, Turkey, and Russia—have higher real interest rates. Real rates in New Zealand, Thailand, China, and Australia look high given their low inflation rates, and therefore should have more room to cut rates if necessary. Chart 7 also indicates that moderate or lower interest rates encourage more savings, whereas higher rates do not.

Demographic Structure

The dependency ratio combines two types of dependents to the working-age population: people under the age 15 or older than 65. All else equal, an aging population means a higher dependency ratio, and lower savings rate. Demographics play an important role in determining the national savings rate, as it drives decisions on savings and investments. Chart 8 shows the dependency ratio by county, and ranges from 30 to 60, with China and South Korea having the lowest ratio and Japan having the highest. The decline in Japan's savings rate can be attributed partially to its aging population. China's demographics reached a tipping point in 2013, but still remain relatively young.

Savings Rates on a Sector Level for Sample Countries

We selected seven major countries—the U.S., China, Japan, South Korea, Germany, the U.K., Australia, and Canada—because they have the most complete data. We then dissected their savings rates by three different sectors: government, corporate, and household savings. All three savings rates are shown as a percent of nominal GDP. Current account balances and fiscal budget balances as a percent of GDP for most of the countries are also included in the Charts 9-15.

• Corporate savings are the biggest share of national savings in most of these countries, except for Australia, where household savings makes up the lion's share. Corporate savings declined for almost all of those countries, indicating weaker profitability, and hence dissaving in the corporate sector, especially in Australia and China.
• Household savings are sharply falling in the U.K. and slightly in Japan, whereas it increased in Australia.
• Government savings are mostly below 5% of GDP for the countries we selected and are negative for Japan, the U.K. and U.S., raising some doubt regarding how much fiscal stimulus those countries afford. Fiscal balance is mostly hovering around zero or in the deficit zone, with the fiscal balance in the U.S. improving, thanks to fiscal austerity.
• The national savings rate is on an uptrend in countries with some forms of negative- (NIRP), zero- (ZIRP), or low-interest-rate policies or quantitative easing (QE), such as: Japan, the U.S., and Germany. This indicates that monetary stimulus did not encourage spending, rather, looser policy encouraged saving. The national savings rate in the U.S. is up from its trough at 14% in 2009 to 18% in 2015. The savings rate increase in the U.S. was driven by fiscal austerity in its government sector.
• The national savings rate is on a down trend in countries that are experiencing some form of a housing bubble/boom, such as: Australia, Canada, and China. Although China has been regarded as the biggest saver in the world, we believe some attention should be paid to the fact that its national savings rate has declined since the Global Financial Crisis, falling from its peak of 50% in 2008 to 45% in 2015. The recent decline in China's national savings can be attributed to four factors:
  1. China's aging demographics and the gradual buildup of a national social security system.
  2. Weaker corporate profits due to slowing productivity growth as a result of excess capacity in many sectors.
  3. More liberalized interest rates and a more developed financial market, which have enabled Chinese companies' access to external financing.
  4. Slower growth of government income as a result of growth slowdown.

The real question is whether the recent drop in China's savings rate is temporary, or whether it represents the beginning of a long-term economic decline comparable to 1990s Japan.

Investment Implications

By simply examining the ebbs and flows of the global savings trend, we cannot discern whether and where the saving glut exists, since this is more of an equity concept determined by the differential between ex-ante savings and ex-post investment. However, by observing the general trend of changes in savings rates and our sector flow of savings, we can identify important regional and country patterns. How the savings rate trends interact with some of the variables that drive savings is also very meaningful.

We believe the national savings rate increases in Europe, Japan and the U.S. are particularly interesting as their central banks have prescribed heavy doses of ZIRP/NIRP/QE policies. The rise in savings in our opinion proves that loose monetary policy is not always able to boost growth or generate inflation; instead, they only encourage savings gluts. What those policies did achieve, was creating asset bubbles in emerging market countries, hence why savings rates show some decline in those regions. We believe central banks should take a more common sense approach—printing more money will not boost growth. It is time for central banks to reassess their monetary policies; what they decide to do will significantly impact yield curves and risk assets.