The savings rate increases in Spain, is there fear of a new crisis?
The savings rate for the second quarter of 2019 has increased to 13.3%. We are talking about the highest level of savings since the first quarter of 2010. What is the reason for this? Improvement in disposable income or fear of a new crisis?
It is enough to take a look at the data from Eurostat, the statistical office of the European Union, to realize that the savings rate has increased notably in Spanish households. The poor economic prospects seem to be the cause of the increase in savings, although it is true that there are other factors that would also explain this trend.
Let's start by explaining what the savings rate is. Well, this indicator shows the percentage of income that citizens reserve after satisfying their needs. The increase in the savings rate is explained by two reasons:
- The first of this would be the decision of individuals to reduce their consumption.
- The other possibility would be that, in the face of an increase in disposable income, with the consumption needs satisfied, the percentage of income destined to savings increases.
Effects on gross domestic product (GDP)
A certain sense of economic pessimism floats in the atmosphere. Complicated horizons are drawn and, normally, consumers, faced with uncertainty or poor prospects, opt for savings, which is known as the “precautionary effect”. In this way, families choose to reduce their additional consumption or stop investing in durable goods such as cars.
However, an increase in savings to the detriment of consumption can be a serious blow to economic growth. Private consumption is a fundamental component in the Spanish GDP. In this sense, private consumption represents up to 56% of GDP. In other words, without consumption, there is no economic growth. It is clear that the drop in consumption can be a serious blow not only for the Spanish economy, but also for the European economy.
The thoughts of many go back to the past, to the severe crisis that erupted in 2008. Although it is true that it is expected that, instead of a severe recession, it will be a slowdown or economic stagnation.
If consumption has fallen, why does the Spanish GDP continue to show positive figures? Despite the decline in domestic consumption, public spending (18.7% of GDP) and net exports have contributed to "maintaining the momentum". However, it should be clarified that the positive balance of net exports (difference between exports and imports) is explained by a decrease in exports as a result of lower Spanish domestic demand.
Regarding the increase in savings, we find explanations based on positive and negative factors. One of the positive aspects is that, although at a slower pace, job creation continues, allowing the disposable income of citizens to increase. On the contrary, the other side of the coin, as we previously pointed out, is the fear of an uncertain economic environment with the trade war and Brexit as a backdrop. Without forgetting, yes, the Catalan conflict that directly affects Catalonia and, therefore, the Spanish economy. Thus, faced with unflattering scenarios, there are many who resort to investing in fixed income products and sovereign debt.
The effect of negative interest rates
Beyond the effects on GDP, another aspect to take into account is interest rates. Currently, the European Central Bank is pursuing a negative interest rate policy. The purpose of this measure is to achieve fluid credit, stimulate consumption and encourage investment through low interest rates.
But these kinds of measures can produce effects contrary to those desired. Low interest rates can be seen as an indication that difficult times for the economy are approaching and, therefore, there are many who, as a precaution, resort to saving.
Even so, there are those who defend that negative or very low interest rates can encourage savings. The supporters of this theory affirm that, given the low profitability of fixed income instruments, individuals compensate it by allocating a higher percentage to savings.