Belgians are saving less and less, and that has implications
The coronavirus crisis caused Belgians to save in abundance in 2020. As the pandemic subsides, the unprecedentedly high household savings rate will return to normal, which will underpin the economic recovery. In the coming years, the declining trend in the savings rate seen in recent decades is likely to continue as the population ages. This has potentially important macroeconomic implications. A sustained decline in savings may ultimately result in structural deficits on the current account of the balance of payments. In addition, it is all the more important that the less abundant savings are used in a more growth-enhancing and sustainable manner.
Household saving behaviour is the result of a complex interplay of economic, psychological and demographic factors. Depending on the circumstances, other explanations for saving apply. During the pandemic, the savings rate of Belgian households (i.e., the part of their disposable income that is saved) climbed to unprecedented levels. This was because households were severely curtailed in their ability to consume as a result of lockdown measures, because they spontaneously avoided shopping to reduce the risk of exposure, and because they were more cautious regarding the economic situation. More precisely, an average of 20.2% of disposable income was saved in 2020, up from an average of 12.4% in 2019.
The trend in the savings rate during the recent crisis was rather atypical, illustrating that the figure is strongly influenced in the short term by specific events or the economic situation, and the related confidence of households regarding the future. In periods of economic uncertainty, in particular concerning the situation on the labour market, households tend to increase their precautionary savings (i.e., to build up a financial buffer). This link is illustrated by the consumer confidence indicator, in particular, the component that measures expectations for the trend in unemployment for the year ahead (figure 1). During the Great Recession of 2009, the savings rate also increased, in line with the deterioration in the outlook for unemployment at the time.
In the somewhat longer term, structural factors generally play a more important role. The sharp fall in interest rates in recent decades, for example, has eroded the interest income that households obtain from their assets. Since households save primarily this income, while labour income is largely consumed, the savings rate has tended to fall (figure 2). As the average wealth per household in Belgium is among the highest in the world, the decline in asset incomes had a relatively large impact on the savings rate. As a result, Belgian households have evolved in recent decades from savings champions to European mid-rankers. From 1999 until the financial crisis of 2008, the Belgian savings rate was still on average 4 percentage points above the euro area average. Since then, that difference has decreased, and from 2016 to 2019 it even became slightly negative.
Underlying this, demographics also cloud the picture. The savings rate differs per age cohort, so changes in the age structure of the population can affect the macroeconomic savings rate. Forward-looking individuals build up assets during their working years, which are then used during retirement. This is life-cycle saving, which aims to smooth out consumption and prevent fluctuating living standards during a person’s lifetime. Research shows that this hypothesis is close to reality for Belgium. Between the ages of 30 and 50, Belgians build up financial assets and the savings rate rises. Between the ages of 55 and 65 the savings rate falls and it becomes negative for pensioners. Contrary to older generations, who still attach a lot of importance to saving as a precaution for ‘bad times’, more recent retirees have less difficulty in reducing their assets in order to maintain their previous standard of living. Due to the ageing of the population, the ratio between the number of savers (the population aged 30+ up to retirement age) and the number of people who are dissaving (the retirees) has been declining steadily in recent years. This also contributed to the structurally declining savings rate (figure 2).
As the pandemic subsides, the savings rate will return to a normal level. In Q2 of 2021 (latest available figure), the savings rate was still 18.2%, down from a peak of 25.9% in Q2 of 2020. Moreover, further ageing of the population looks set to continue putting downward pressure on the savings ratio in the coming years. Until now, the decline in Belgian household savings has not been a source of macroeconomic concern. Although it has played a part in the erosion of the current account surplus, the balance on that account (also called the external position) is not negative for the time being (figure 3). This means that there is still sufficient domestic savings to finance investment.
However, to the extent that the decline in household savings continues on a structural basis, there is a risk that it will eventually result in (unsustainable) external deficits. Ultimately, this will have to be compensated. This can be done, for example, by increasing government savings or by extending the effective retirement age, which will limit the reduction in the ratio between the active generations (who are saving) and the pensioners (who are dissaving). Furthermore, a structurally declining household savings rate makes the efficient use of savings for entrepreneurial initiatives that are sustainable and growth-enhancing all the more important. Despite the virtual absence of interest payments, Belgians continue to give massive preference to risk-free bank deposits. Risk appetite improved somewhat recently but remains too small.