Source
r/AusFinance•
tyransyn

Thoughts and Predictions on household saving rate change over the next few months/years?

Considering that economic uncertainty pretty much guarantees an aggregate reduction in discretionary spending it should be almost a given that the household saving rate will increase. The issue is the circumstances and market fundamentals behind COVID are not the same as the GFC (and prior to the GFC).

Going off the trading economics data the saving rate jumped from ~1% to 10% during 2008-2009 and has steadily declined since the peak to around 4% in late 2019. How much do you think this rate will rise and how long do you think it will persist for before gradually declining like it has for the last 10 years?

Posted May 13, 2020, 11:52 PM UTC

146
Dav2310675•

Great question - I've been thinking about this lately as well.

My perspective is this will depend on the individual household circumstances.

If a household has their income largely unaffected, I agree. These households will likely increase their savings. Same goes for those whose income is moderately affected. I expect that group to be more inclined to save than those who were unaffected as they will have had a scare.

For those households who are greatly affected by a reduction in income, I don't see their savings rate increasing. This is because whilst they would, they don't have the income to do so. Their spending will skew towards essential spending and away from discretionary spending. This group will likely save once their income increases to what it had been before this crisis.

Those have just been my thoughts on this.

18
twoofseven•

Skyrocket short term, right? Over 10% of mortgage holders, I think, have taken up repayment deferrals. Small businesses are going to be getting JobKeeper and the cashflow booster windfalls. Plus the normal fear reaction, plus the enforced lockdown savings (although retail sales are up, so I'm not sure how that works).

On the other side, the doubling of the JobSeeker thing is leading to increased spending.

Overall, I think a huge jump for 6 months.

6
MDInvesting•

To be honest most of the data I read showed the past 6 months things starting to increase on the reduced spending and increased saving front.

The recent changes to flows of income could see the total savings rates fluctuate with the ongoing unemployment concerns driving the hoarding of cash that is available. ie stories of friend hardships will drive people who do have income to save.

household savings rate - TradingEconomics

3
What_Is_X•

Why would you assume that the average savings rate will increase, if average wage "growth" is negative and unemployment is rising rapidly?

2
tyransynOP•

The saving rate is a ratio of saving as a percentage of total income. The rate/ratio rises as people "anticipate" worsening conditions and thus will "save for a rainy day". This phenomenon is observed during the GFC where if you look carefully in 2005 the Australian average household's saving rate was actually ~-2% but during the GFC it rose to 10% (you will have to change it to the 25Y option).

This happens all around the world during recessions as pointed out in this "non-authoritative" source:

https://www.economicshelp.org/blog/146244/economics/factors-that-influence-saving-levels/

Rising income levels will lead to a rise in total saving levels. As households gain more disposable income and have the ability to save more. However, periods of economic growth can also create optimism and confidence amongst consumers and encourage a relatively higher percentage of consumption. When households expect rising incomes, then they are more likely to borrow to finance luxury goods and cut back on spending.

If we look at the UK household saving ratio, then it appears the saving ratio is cyclical.

During the 1980s, the saving ratio fell during the “Lawson Boom” – but then rose during the 1990-92 recession.

The saving ratio then fell during the long period of economic expansion (Great moderation). Then in the 2008/09 recession, the saving ratio shot up.

This suggests that the economic cycle has a clear effect on the savings ratio – during a recession – the saving ratio rises – during growth, the saving ratio falls.

Finally not everyone loses their job. Even if you count everyone receiving JobKeeper payments as "unemployed" that still leaves ~11 million employed and they will cut back on stuff deemed unnecessary expenses.

2
[deleted]•

[deleted]

1
mustang2002•

negative wealth effect

1