Archive for the ‘Savings’ Category

DCF 1.0

Fear. In different times greed is just as important. But right now, and across most of Europe, fear is the key driver. Money sloshes around, and all that those who control it want to do is limit the downsize. They are trying to mitigate against fear. And so afraid are they, that at times they have put money in assets that give negative interest rates, just to feel safe. This has been rather good news for Germany, because while fear has driven money away from Greece and Spain and co, making the government cost of repaying debt in these countries seem prohibitive, in Germany it has been quite different. Fear has boosted Germany coffers. And a new report tells us that the boost has been dramatic. This is why.

The euro crisis just won’t go away. In Germany they are sick of it too, and with good reason. Germany has done nothing wrong. Its work force has worked hard, saved for retirement, and what is wrong with that? Yet they are being punished; they are told that to atone for their sins of working hard and saving for the future, they must pick up the tab for indebted Europe. Yet, there is another way of looking at this, according to data produced by Germany’s own finance ministry, because the country has made a tidy profit from the euro crisis.

It all boils down the fact that money has to go somewhere. Corporates are saving. Across much of Europe, households are saving. Where does the money go? One thing is for sure, putting it in Greek bonds is risky. Spanish, Italian and Portuguese bonds don’t seem much safer either. But German bonds, in contrast, feel as safe as a safe house in a land with no crime. In fact so safe are German government bonds or bunds, perceived to be, that there have been times when the yields on some of them have been negative. So actually, Germany has done rather well out of fear created by the euro crisis – or should that be the other way around – a euro crisis created by fear? But can we put a number on how well?

German Social Democrat Joachim Poss wanted to know how much, and, as a man in power, he got an answer. The Germany finance ministry responded to Poss’s question by getting the abacus out and making some calculations. The ministry took its estimate for interest payments on its debt, and subtracted from that the actual interest. From its calculations it drew the conclusion that between 2010 and 2014, it will save 40.9 billion euros thanks to interest rates being lower than expected, which is thanks to money flooding into German bunds for the sake of safety.

This is a rather important point. Right now, Italy is posting a primary budget surplus, meaning its government is spending less than it receives before deducting interest on debt. If it was paying the kind of interest on debt that the German government pays, Italy would be close to being in surplus. And that in a nut shell is the case for euro bonds; that is to say for all countries in the euro area to raise money by using the same bonds, backed by each and every government. You can see why Germany does not like that idea, but then again, a monetary union with one central bank controlling monetary policy, cannot really work unless governments pay the same interest on their debts.

But the data relating to German savings on its debt does not tell the full story. The fact is that German exporters, the drivers of its economy, have done well out of the euro for another reason. If Germany still had the Deutsche mark, the currency would surely have risen sharply in recent years. By sharing a currency with the likes of Greece, Germany has enjoyed a massive terms of trade benefit.

So actually, for Germany there have been plenty of upsides to being in the euro, which is why it is right that it pays for the downsides too.

© Investment & Business News 2013

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It is kind of assumed that savings are good, debt is bad. If that is so, then there has been good news from the EU and bad news from the UK. In the EU savings ratios are rising, according to recent data, while in the UK they are falling. So that is EU good, UK bad. It is just that the real story is quite different, because there is something missing, and that missing ingredient is called investment.

Across the global economy savings equal investment. They have to; it is a matter of definition. GDP equals consumption plus exports, minus imports, government spending and investment. But across the global economy exports must equal imports. Drill down and look at government spending and actually it is one of two things: consumption or investment. So GDP really equals consumption plus investment.

But what are savings? By definition they are income that is earned but not spent on consumption. So by definition, savings equal investment.

But supposing we all decide we want to save more, and we all park more of our earnings in our savings account. Supposing there is no corresponding rise in investment. If this were to happen, given the equation that GDP equals consumption and investment, then either as we save more, other people borrow more, or the money we save is lost forever.

To put it another way, across the economy there is no point in saving unless this is matched by investment.

Now take the EU. According to data yesterday (30 July) in the EU27, the household saving rate was 11.0 per cent, compared with 10.7 per cent in the previous quarter. In contrast the household investment rate was 7.9 per cent in the first quarter of 2013, compared with 8.1 per cent in the fourth quarter of 2012.

Now take the euro area. In the first quarter of 2013, the household saving rate was 13.1 per cent, compared with 12.4 per cent in the fourth quarter of 2012. The household investment rate was 8.4 per cent, compared with 8.7 per cent in the previous quarter.

In short, savings ratios are rising, but investment ratios are not. This is not merely a negative development, it borders on being disastrous.

In contrast, the household savings ratio in the UK was 4.2 per cent in Q1 2013, the weakest since Q1 2009 when it was 3.4 per cent. The UK savings ratio is too low, but what really matters is not savings, it is investment.

In the UK investment remains way too low, but here is some rare good news. 2013 looks to be on course for seeing the highest levels of investment in the UK since before the crisis of 2008.

© Investment & Business News 2013

Back in May 2010, increases in average wages were less than the rate of inflation. It has been that way every month since. Consumers may be feeling more confident, retail sales may be up, but one thing is sure, the improvements in sentiment are not down to rising wages. But in the latest data from the ONS there was a whiff of hope. Is it possible that wages are at last set to rise faster than prices?

In May 2010 inflation was 3.4 per cent. Wages (that’s including bonuses, by the way) rose by 2.5 per cent. Ever since then it has just got worse. The gap peaked in October 2011, when inflation was 5 per cent, and averages wages rose by 2 per cent, and until very recently the gap was almost as large. In March, for example, inflation was 2.8 per cent, while average wages rose by just 0.6 per cent. But since then things have begun to look better – that’s despite inflation getting worse. In May inflation was 2.9 per cent, but wages rose by 1.9 per cent. This was the highest level of annual increase in average wages since January 2012.

Looking forward, inflation may pick up over the next few months, but it is likely to fall later in the year.
So, if the rate of increase in average wages can carry on rising for a little longer, within a few months we might once again find wages are rising faster than inflation.

Many economists believe that a sustainable recovery in the UK economy can only occur once wages rise faster than inflation.

That, by the way, has been the snag with recent reports pointing to rising house prices and retail sales. How can they rise, if real wages – that is wages relative to inflation – are falling? Answer: they can only rise if household debt increases, and as it was told here the other day, UK housholds have enough debt as it is. See: What will happen to households as rates rise? 

In fact the hard data provides the evidence. UK households have been saving a lot less of late and borrowing more.

 

And so returning to wages and inflation, if it is the case that at last wages can rise faster than inflation then that is reason to celebrate.

It is just that in the long run, wages can only rise faster than inflation if productivity is improving. Alas there seems to be precious little evidence of that occurring at the moment.

© Investment & Business News 2013

Let’s hope you are sitting down because this may come as a shock. It turns out that a lot of Brits are not saving enough.

According to Prudential: “One in seven (14 per cent) people planning to retire this year will depend on the State Pension as they have no other pension.”

The Prudential analysis also reveals that nearly one in five (18 per cent) of those planning to retire this year will be below the poverty line. The Joseph Rowntree Foundation estimates that to be above the poverty line a single pensioner in the UK needs an income of at least £8,254 a year, yet 18 per cent of those retiring in 2013 expect to retire on less than this.

The findings also highlight a significant gender divide, with 21 per cent of women expected to retire below the poverty line in 2013 compared with 14 per cent of men. In addition, women are nearly three times more likely than men to have no other pension – 23 per cent of women retiring in 2013 will retire without a private pension, compared with just 8 per cent of men.

The truth is that the retirement of the baby boomers, something we are only just beginning to experience, will provide the single biggest challenge to the UK economy over the next few decades. Indeed the US and much of Europe face a similar challenge.

You could say that what is happening in the UK now happened in Japan 20 years ago.

What is the answer?

From a micro point of view it is for us all to save more. But if we all save more, the result may be recession and falling wages, which in turn may make it harder to save.

From a macro point of view we need investment into innovation, infrastructure and just in trying to create a more dynamic and stronger economy. Or we need more immigrants, which is not an idea that is likely to prove very popular.

© Investment & Business News 2013

The data was revealed a week or so ago. It is pretty clear cut. According to the ECB, the median wealth of the Spanish is 183,000 euros, 172,000 euros for Italians, 75,000 for the Portuguese, and a stunning 267,000 euros in Cyprus. In contrast, median wealth in Germany is just 51,000 euros.

So that’s it then. The problem is not that the poor old Spanish and Cypriots are being pulverised by the vicious EU, which is being prompted by Germany into punishing them for mythical misdeeds. Instead, the real problem is that poverty stricken German households barely have two cents to rub together.

The solution is simple enough: tax ‘em. Have a wealth tax. And where will it end? Will the meat in your freezer – beef, horse or otherwise – be seen as wealth and subjected to tax?

There is an alternative take. Writing in the ‘FT’, Wolfgang Munchau argued that the ECB survey was in fact being taken out of context. For one thing, he said median wealth is a meaningless guide. He said: “If you want to compare across countries, it is better to take the mean.” Mr Munchau suggested that if we use mean wealth as the guide, then Germany’s does not lag behind troubled Europe as much as the quoted data suggests. It is not clear that Mr Munchau is right here, however. After all, median data is the better measure for telling us the position of most people, and is not distorted by a small number of people with massive wealth.

But Mr Munchau made a more substantive point. Actually the differences in wealth are a symptom of the euro – that is to say, a Cypriot euro has less value than a German euro, hence Cypriot assets appear to be worth more.

Others question the limitation of the ECB data, and say it does not take into account savings in pension schemes.

But there are other more important points. For one thing, the ECB survey relates to asset values from a couple of years ago. Asset prices across much of troubled Europe have crashed since.

Besides we all know that in Germany the housing market is seen as less important. The Germans do not celebrate house prices going up – they mourn.

The data does suggest an interesting idea though. Is the reason the savings ratio in Germany is relatively high, and thus consumption to income relatively low, because Germans have less wealth tied in the home, and after a period of rising house prices, appear to have less wealth?

©2013 Investment and Business News.

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If you had read the ‘Sunday Times’ this weekend you could be forgiven for believing the UK is at last on the mend. The good old days are set to return. No more bust; lots more boom. Except –

Well, before we get to the ‘except’ part, let’s remind ourselves of the news that one just has to accept is good.

Employment hit its highest level ever in the three months to August, says the Office of National Statistics, and unemployment fell to 7.8 per cent during the same period, which is the lowest level since spring time 2011. Inflation is falling too, with the CPI rate going down from 2.5 per cent in August, to 2.2 per cent in September. Okay, with averages wages in the year to August rising by 1.7 per cent, the average worker was worse off, but the gap between inflation measured by this index and rising wages was the smallest since April 2010. And finally, if that isn’t enough good news for one day, other data out last week revealed a good month for the High Street, with retail sales rising by 0.6 per cent in September on the month before. Apparently, total sales were at their joint highest ever in the month.

Except…

There are several problems, but here is the big one – at least it’s a theory, and it’s a view not recognised by economists.

Saving is the new black. Saving has become fashionable. During the boom getting into debt was seen by some as a form of machismo, but now saving is the all the rage. That is partly why interest rates are so low. The Bank of England reckons we are saving too much, so its cuts rates in order to encourage less saving and more borrowing.

There are several reasons for this rise in the popularity of savings. During the 1990s we enjoyed money for nothing as stock markets boomed. Modest savings put into a pension fund rose at a pace that was completely off the charts in comparison with rising output. Who needed to save much, when most of us appeared to be guaranteed a prosperous retirement regardless?

The stock markets crashed, and the FTSE 100 peaked on December 30 1999, and it still languishes around 1,000 points below that level. But then house prices surged. Who needs to save when year in, year out our homes rise in value at a rate almost as high as our annual salary?

The retirement of the baby boomers always was a problem in the making, but the snag is that we had a finance crisis before this generation got around to retiring, making a bad problem a good deal more serious.

In 2008, many economists were missing the possibility that saving rates may start to rise. They are missing it again.

In Q2 this year income per household rose by an average of £69 (after allowing for inflation), yet spending fell. Why? Because the extra money was saved, lifting the savings ratio from 6.0 per cent in Q1 to 6.7 per cent. Some economists say that as inflation falls below increases in average wages, spending will start to increase, which will lift the UK out of recession into sustainable growth.  Maybe, but it is equally possible the difference will just be saved as panicking baby boomers fret about how they will fund their old age.

What is the solution? There are limited answers, but one is for the government to take the money UK individuals are so keen to lend to it, and use it to fund investment in public infrastructure and, even more importantly, in providing funding for budding entrepreneurs.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here