The household savings rates in Australia was only 2.80 percent in the first quarter of 2019. The average savings rate was 9.49 percent from 1959 until 2019 which means that our savings rate is now extremely low when compared to the Australian average.  With many households highly indebted, Australians may be digging into their savings account to cover bills. In this article we look at the problems that can occur with a national low savings rate.

Decrease in household expenditure

Household consumption expenditure accounts for the largest portion of GDP. A falling savings rate indicates household spending may not continue to be strong.

When the economy is weak the problem worsens. This is because individuals tend to hoard money when they do not have confidence in the economy.

However, if everyone starts to save all at once then it weakens economic activity further. This is due to a decrease in the consumption of goods and services. When the economy slows, businesses also slow and some people would lose their jobs. This becomes a vicious cycle as mass redundancies means more people are restricting their spending. It is better to accumulate savings in a boom period but not in a period of economic weakness. Economic stagnation is caused when consumers are reluctant to buy.

Savings increases investment

When there are high savings then it can contribute to an increase to investment. This is because these savings deposits allow banks to lend money to firms to expand their business. Hence large savings can help the expansion of the economy. When there is an economy where the savings rate is low, it may mean that the economy is choosing short-term consumption over long-term investment.

When large savings are deposited with banks, these banks can use these depositors to lend out to businesses. When savings are low, then banks rely on foreign capital to fund their loans.

The accumulated money from individual savers is available for capital investment. Therefore an increase in the savings rate increases capital investment.

Warnings Signs

Negative savings rates can indicate turbulent times ahead. It can show signs of the exuberant spending and a perhaps a recession. Higher savings rates are usually associated with longer lasting growth cycles. For a number of years before the GFC, the savings rate was negative.

Lauren Hua is a private client adviser at Fairmont Equities.

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