To save or to spend: simply a matter of sentiment?

In Canada the “savings” trend for the average person has been on a decline for decades. There was a time when the previous generation, and the ones before that – would save some 5 to 10% of their family’s net income. Great for thinking ahead – planning for retirement or just saving for a rainy day. But this prudent habit nearly all but ended in recent years until the financial meltdown and great recession of 2008-09.

Now the fear is that savings rates will escalate at a rapid pace – swinging the pendulum too far to the other side – and this excessive savings means that there will be less spending. Less consumer spending, of course, has a substantial negative impact of the economy. Therein lies the conundrum.

Consumer confusion: Save more, or spend more to help Canada's economy
By Brenda Bouw, The Canadian Press

The recession is confusing a lot of consumers who on the one hand are told to save money for a rainy day but on the other are encouraged to spend to help boost the economy.

It's a conundrum economists call "the paradox of thrift," which means that too much savings can lead to an overall drop in consumption and threaten a nation's economic growth.

"Saving is good, but at the same time ... consumption is good," said CIBC World Markets economist Krishen Rangasamy.

Rangasamy said savings rates typically fall when the economy is strong and rise when it's weak. Consumption rates run in the opposite directions.

When times are good, Rangasamy said people feel comfortable with the rising price of their homes and stock portfolios and spend more.

"They think 'Why do I need to save when I am getting richer?"' he said.

On the flip side, when a recession hits, there's a change in mindset.

"That encourages people to save for the future," he said, which in turn weighs on consumption, which in turn contributes to a weaker economy and higher job losses.

Rangasamy said the key to a solid economy is a balance of both saving and spending.
"Zero per cent savings is not good and neither is 40 per cent," he said
Canadians' savings rate was 4.5 per cent in the April-June quarter, according to Statistics Canada. That is up from 3.4 per cent for same time last year and well above the 1.9 per cent savings rate in the second quarter of 2007.

The savings rate was 6.1 per cent in 2001, when the last economic downturn hit. That's the highest it has been since 1996.




Saverio Manzo