Academic journal article The Reserve Bank of New Zealand Bulletin

Savings and the Household Balance Sheet

Academic journal article The Reserve Bank of New Zealand Bulletin

Savings and the Household Balance Sheet

Article excerpt

The past decade and a half has seen a consistent decline in the household savings rate in New Zealand. This trend is not isolated to New Zealand, but is also occurring in other OECD countries. In addition, household indebtedness has risen at a faster rate than in other OECD countries. It is difficult to know how much further the savings rate will fall and household indebtedness will increase, but an adjustment in behaviour is likely at some point. The low household savings rate has contributed to an ongoing reliance on foreign savings. The banking system appears to manage the risks associated with using foreign savings well. However, as New Zealand's reliance on foreign savings increases, the economy at large potentially becomes more exposed to changes in international investor preferences, while households may become more sensitive to changes in interest rates, the labour market or house prices.

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1 Introduction

Over the past 15 years, the level of savings undertaken by New Zealand households has fallen sharply, a trend mirrored in other OECD countries. During this period, household debt has risen sharply, largely for the purposes of financing housing activity. This article reviews developments in household savings and the wider household balance sheet against the backdrop of savings behaviour for the New Zealand economy as a whole. It draws some comparisons with other countries and explains the link between savings behaviour and the country's current account deficit. (2)

Household savings is a subject of considerable interest to a wide range of policy-makers and raises a host of issues. Many--such as whether households are saving adequately for retirement--are beyond the scope of this article. However, the article highlights some important macro-economic issues. As household saving falls, the reliance on foreign savings to fund investment tends to increase unless the fall in household savings is offset by a rise in savings by other domestic sectors. In turn, the economy potentially becomes more exposed to shifts in the investment preferences of foreign investors and their willingness to lend to New Zealand. In addition, a more indebted household sector may become more sensitive to changes in interest rates and incomes, a factor of particular importance to monetary policy.

2 Savings by sector

National savings is the proportion of a country's income that is not consumed in a particular period and is therefore available for investment (see box 1). While this article focuses on household savings, it is useful to look at how the overall national savings rate has trended. Figure 1 shows the sectoral breakdown of savings by households, business and the public (government) sectors, each expressed as a percentage of GDP. (3) The household savings rate has been trending downwards, and this will be analysed in further detail later on. Business savings, on the other hand, have been trending upwards since the early 1990s, and have been the main contributor to national savings. Business savings are the retained profits or undistributed income of companies, so the increase in business savings is largely a reflection of rising profitability among New Zealand companies. After a period of running budget deficits, the government started to run budget surpluses from the mid-1990s. This resulted in an improvement in public savings, which is now a strong contributor to national savings.

Although both business and public savings have increased significantly over the past decade, this improvement has only just been enough to offset the continual decline in household savings. The net national savings rate has been almost flat since the late 1980s apart from the decline in the early 1990s, but has remained positive apart from the 1992/93 period. Despite a positive net national savings rate, this has been insufficient to fully fund new investment in the economy, and the country has continued to run current account deficits (figure 2 and box 1). …

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