BackCurrent account numbers imply lower savings rate in economy
The expectation was that higher real interest rates would pull up savings, but that doesn't seem to be happening
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The balance of payments data for the first nine months of 2015-16, out on Monday, tells us that the savings rate in the economy continues to go down.
The current account deficit (CAD), as a percentage of gross domestic product (GDP), is the difference between the investment rate and the savings rate. The accompanying chart shows that investment as a percentage of GDP has been falling sharply, coming down from 39% in 2011-12 to 32.9% in the first nine months of 2015-16. While the numbers for investment or capital formation are available from the GDP data, the savings data for the current fiscal year is not available.
But we now have the data for CAD for the first nine months of the year. That works out to 1.4% of GDP at current prices for the April-December 2015 period. The savings rate, therefore, is (32.9-1.4), or 31.5% of GDP. The chart shows this rate is well below the FY15 savings rate.
The expectation was that higher real interest rates would pull up savings, but that doesn’t seem to be happening. The lower level of inflation too doesn’t seem to have had much of an impact on savings. Note that overall savings is lower despite a smaller government deficit, which implies the weakness probably lies is lower corporate and household savings. One last point—if GDP growth is as high as claimed in the official statistics, shouldn’t the savings rate too be higher?
What about the likely savings rate for the full 2015-16 year? Well, the advance GDP estimates show capital formation of 32.6% of GDP for the full year. That is, rather surprisingly, lower than the rate for the first nine months. Most economists believe CAD will be in the 0.9-1.1% range for 2015-16 as a whole. That would imply a savings rate in the range of 31.3-31.5% of GDP. Even if it is a bit higher than that, it would still be well below last year’s rate.
In other words, the low CAD we have now is the result of the investment drought in the economy, combined with a lower level of savings. It is hardly a reason for celebration.
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