The last six years have witnessed the most severe financial crisis since the end of World War II, with household earning capacity and saving ability experiencing significant changes due to the downturn in the real economies. This challenging economic situation definitely affected household saving behavior, although the impact has been different in various countries – for some, the impact on household earning capacity was more intense than others.
Recently, members of our investment team in Europe gathered research on Savings & Wealth Trends in 2007-2013. Their findings were very interesting and I wanted to share some highlights.
Holding Steady, Despite Challenges
European households endured a sizeable reduction in their per capita real gross disposable income (GDI), with the exception of Germany, which exhibited an increase. Saving rates for Germany and France, two countries historically characterized by high and stable levels of saving, did not show significant fluctuations in the last few years and are also expected to remain well above the 15% threshold in 2013. Japan is another country that has shown a stable saving rate (8.3% of income in 2012), although at lower levels compared to the two core euro area countries.
A “Change of Habit”, but Still Lagging Behind
The US and UK, typically considered among the highest “spenders” in the early 2000s, have shown a significant increase in the tendency to save, a sign of a “change of habit” after 2008. More restrictive credit market conditions, following the burst of the sub-prime crisis, are probably one of the main causes of this attitudinal shift. Despite the increase in saving, these two countries continue to be marked by relatively lower saving rates compared to the rest of the countries we analyzed.
On the other hand, Italy, Austria, Spain and Greece have experienced a visible decline in saving over the last few years. We believe in these regions, the steep fall in incomes combined with higher taxes are key elements that have driven down the ability to save. In other words, the erosion of revenue, along with consumption levels that have not declined as rapidly, had a direct impact on household ability to accumulate resources for the future.
For 2013, with the market normalizing and some signals of a turnaround on the economic front, we believe saving rates will increase (compared to 2012) in Italy and Spain (11.9% and 8.5% respectively), while Austria should remain stable at 12%. We anticipate a further saving decrease in Greece (7.4%) and some reduction for Portugal, which is expected to revert to its historical average.
Household Wealth on the Rise?
Much of the volatility observed in household total net worth is a direct consequence of changes in financial asset prices. From 2009, most of the countries we observed underwent a period of uninterrupted growth in financial assets, thanks to both market appreciation and new money flowing into financial investments. Now, many of these financial assets have largely closed the gap in valuations with respect to 2008 (with the exception of Spain and Greece). In six year’s time, the strongest appreciation was reported by France and the UK, where household assets are now up 19% compared to 2007 values, followed by Austria (+17%) , Germany (+15%) and the US (+13%). More subdued asset growth was recorded for peripheral European countries, where the sovereign debt crisis weighed on both household confidence as well as asset valuations.
Between 2007 and 2013, German households, on the back of a buoyant economy, experienced the most significant progress in total net wealth (+23%). German and Italian households were least affected by the collapse of financial markets in 2008. Italy, however, was unable to recover and ended up with just a 2% increase in wealth over the six-year period. Japanese household results were worse as their net wealth is expected to be 5% lower in 2013 compared to 2007.
Household Net Wealth (in % to 2007 values)
Source: OECD, National Statistics Institutes and Central Banks, as of September 30, 2013. 2013 estimates: Pioneer Investments.
With higher exposure of portfolios to equity markets, U.S. and UK households shouldered the most significant drop in wealth in 2008. However, following the upsurge in market prices after 2009, these countries were characterized by a much quicker upturn in wealth in the following years and are expected to end 2013 with a level of total resources equal to 10% and 16%, respectively, above pre-crisis levels.
In conclusion, the evolution of household incomes is a reflection of the crises that have repeatedly shaken the world’s economies, with particularly negative consequences in Europe, which reflected an almost generalized decline in real GDP in 2008-09 and again in 2011-13.
Note: For calendar years 2007 – 2012, measurements are as of December 31. For 2013, measurements are forecasted for year-end.
© Pioneer Investments