In economics, saving is the decision of consumers to set aside money instead of consuming goods and services. The propensity to save depends on several factors such as interest rates, consumer confidence and expectations for the future. The level of savings can have a great impact on the performance of an economy. Low savings rates can generate higher economic growth in the short term, but lead to lower levels of investment that hinder future economic growth. These are the most important factors in determining the level of savings in an economy.
Access to credit. If bank loans, mortgages, and credit are readily and cheaply available, consumers will be encouraged to borrow. For example, in the period 2002-2007, there was a period of easy credit in which banks were willing to make low-cost loans. However, the credit crisis of 2007-08 made banks reluctant to make loans, especially in the case of subprime loans. As banks withdraw the availability of credit, savings rates will increase
Interest rates. An increase in interest rates makes saving more attractive because of the interest earned on savings. The base rate is the main determinant of savings, as base rates indirectly influence business savings rates. However, commercial banks can offer additional incentives to save by offering attractive deposit accounts. The level of real interest rates is also important. This is the level of interest rates minus inflation. If interest rates are lower than the inflation rate, there is little incentive for people to save.
Confidence in future economic prospects. If people are confident about the future, they will be more willing to borrow money. However, if they fear being unemployed, they will start saving and reduce their loans. Therefore, savings rates tend to be cyclical. Falling in times of economic growth and rising in times of recession.
Attitudes towards saving. Savings rates can vary from country to country significantly. This may reflect cultural changes about saving. For example, China has a relatively high savings rate and the United States has a relatively low savings rate. This reflects a difference in attitude between consumption and saving.
House prices. When home prices are rising, consumers see an increase in home equity. This makes people more optimistic and willing to borrow money. Falling home prices create negative equity, making it much more difficult for people to borrow.
In the short term, savings rates can change due to changes in interest rates and economic confidence. In the longer term, savings rates are determined by the access and availability of savings and credit accounts. Social and cultural attitudes toward debt and saving are also important.
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