Australian analysis demonstrates low rates of saving, threatening long term recovery of retail sales

This from Micheal Evans in the Sydney Morning Post: “Just when retailers thought things couldn’t get much worse, along comes a piece of analysis that raises the prospect of the ordeal having a way to run yet.

It’s a widely held view that households have been saving aggressively as they bring their income and spending back into alignment. And, so the theory goes, they will eventually start spending when they are satisfied they have their debt under control.

But Simon Warner and Andrew Scott from AMP have taken a long-term view of the household savings ratio over 50 years that shows savings remain below historical levels.

In graphical form, they show how the household savings ratio bounced around between 10 per cent and 15 per cent from 1959 until the mid-1980s .

It then began to drop dramatically, falling below 10 per cent and sliding to virtually nil by 2000 when savings rates went negative as the era of cheap debt flourished.

For much of the past decade, savings rates have been between negative 5 per cent and plus 5 per cent .

Now in the wake of the financial crisis, they have jumped back strongly to between 5 per cent and 10 per cent. Warner and Scott point out that while in the US and Europe deleveraging of household balance sheets was forced, in Australia it has been done against the backdrop of a stronger economy.

So while retailers are hoping consumers can amass ”considerable firepower for future spending via a much strengthened balance sheet”, AMP ponders whether savings rates will return to the higher levels of the past 50 years.

The analysts conclude that the savings rate increase ”has been meaningful” and note that ”the risks around the savings rate remain to the upside”. Something unlikely to cheer struggling retailers being buffered by anaemic demand and structural challenges from online sellers.”

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