Standard Life Investments

Weekly Economic Briefing

Europe

Different ways to save

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Respondents to consumer sentiment surveys in the Eurozone have been waxing lyrical about their confidence in the new, stronger growth environment, with overall consumer confidence sitting at a record high. Indeed, consumption has been growing at an impressive clip in the Eurozone GDP accounts thanks to strong domestic demand and disposable income growth. Against such a supportive backdrop, it is little surprise that the household (gross) saving rate in the Eurozone aggregate level has been on the decline since the beginning of 2015 (see Chart 6). While it appeared on first release that the savings rate had ticked up in 2017, revisions to this data suggest that actually it has been largely stationary in 2017 and lower than the 2016 average rate. This reflects stronger disposable income growth naturally increasing the denominator being spent on consumption more than saving. While we await the component breakdown of Q3 GDP, the strong reading suggests that short of a significant and unexpected rotation, strong consumption continues to contribute to above-potential growth in the Eurozone.

It's going down Different strokes for different folks

Of course, while the Eurozone aggregate is stable and low relative to post-crisis history, the country level data reveal idiosyncratic factors at work. In Germany, the saving rate has continued to rise to 17.2% in Q1 and Q2. This is striking given the strength of the German economy and consumer sentiment levels, and reflects structural and cultural tendencies. German households are acknowledged to be avid savers and as the population ages – Germany is tied with Japan for the highest median age at 46.1 – this tendency is reinforced as individuals prepare for retirement. However, this high saving rate does pose issues for Germany in the global trade environment. This contributed to Germany accumulating the largest current account surplus in the world in 2016. Unsurprisingly, Germany comes under fire from its trading partners for not pulling its weight – for holding too much of its wealth in savings and not contributing enough in investment. Nonetheless, policy in Germany is supportive for savers with more generous deposit schemes than its Eurozone counterparts and commentators more concerned that low rates drive households away from saving and toward higher yielding home ownership.

Moving away from Germany, the picture is mixed on (gross) saving rates and reflects the milieu of factors that drive savings (see Chart 7). These differences between member states illustrate how different households and economies react differently to the rates environment and wealth effects. In Spain, saving rates continue to fall, reflecting the growth in disposable income and, moreover, strong increase in consumption growth. In Italy, the saving rate dropped 0.5 percentage points in Q2 even amid a drop in disposable income growth, as households opted to maintain high consumption rates. Q3 will give us a better indication as to whether this is a temporary blip which Italian households have internalised, amid expectations that disposable income will increase again. Meanwhile, Irish saving rates continued to increase to 8.1% in Q2 even though disposable income rose substantially in the quarter. Against such a strong growth backdrop, it may be that post-crisis financing reforms requiring large deposits for mortgages in Ireland are helping to drive savings higher.

Stephanie Kelly, Political Economist, Standard Life Investments