The term “household saving” refers to a household’s disposable income minus its consumption. Disposable income consists of things such as wages and net property income; consumption refers to any costs or expenditures on goods and services. Thus, a negative savings rate indicates that a household spends more than it receives in income, either by going into debt or by eating into past savings. The household saving rates taken into consideration here are measured on a net basis, which takes depreciation into consideration and is the more common measure.
That being said, household saving rates can vary greatly between countries. They are dependent on a myriad of structural and institutional factors - not limited to unemployment, credit markets, education costs, health care and social security costs, pension payments, and population age - all of which affect disposable income or consumption. Furthermore, some nations report a net measure while others report a gross measure. Thus, the most interesting way to look at household saving rates is by historic evolution for the same country.
Why is the household saving rate an important figure? Long-term economic growth is dependent on capital investment, whose main domestic source is household savings. Countries with consistently high saving rates often turn into countries with plenty of funds available for long-term growth. Additionally, more household savings mean that more of a country’s debt can be financed domestically. This option is considered to be more sustainable that external, or foreign, financing of a nation’s debt.
However, higher domestic consumption (the component which is subtracted from disposable income to calculate household savings) is a component of GDP growth. GDP growth is a different, but important, factor in predicting economic recovery. If household consumption rates are low - as they often are post-recession - then a larger percentage of GDP will come from business investments, net exports, and government spending.
Before the 2008 financial crisis, the world saw an overall decline in household saving rates. This was a result of an increase in household borrowing coupled which resulted in a decrease in household savings. As cheaper and more accessible mortgages became available, house prices soared and homebuyers borrowed unprecedented amounts of money with unprecedentedly bad credit. In the US, household debt was greater than 130% in 2007, and other countries - especially the UK, Poland, Hungary, and South Korea - also saw housing bubbles during this time period. Between 2007 and 2008, household saving rates in the United States and the United Kingdom fell to record lows as a result of the financial crisis and recession.
In 2015, after a brief reversal of the downward trend, household saving rates continued back on a downwards trend. Generally speaking, countries with higher disposable incomes tend to have higher savings rates. But this isn’t always the case. The “wealth effect” is a phenomenon in which household a greater “perceived wealth” often spend more of their disposable income and have lower household saving rates. The wealth effect explains the brief period of rising saving rates in the UK, Canada, the US, Germany, and some others. As the recession depleted the values of houses and pension funds in these countries, the household perceived themselves as less wealthy, and were more inclined to save more money. Thus, overall household consumption went down, which translated into a higher household savings rate.
The recent downward turn in 2015 might be explained by the other side of the wealth effect: almost a decade post-recession, houses and pension funds have increased in value and more households perceive themselves as wealthy. This means greater consumption and a lower household savings rate.
Household savings as a % of household disposable income in the EU between 2000 and 2015
Source: OECD
