Scared consumers save more

Consumers can save or spend their income. This comes back to the identity Y=C+S.

Yes, consumers have to pay tax. And yes, consumers can use their savings to invest. The key part is that, when consumers receive their pay, they can either spend it now or put it away for later (savings/investment).

My point: the level of savings depends on consumer confidence, and consumer confidence is substantially affected by the economic outlook.

Let’s explain with the use of a graph.

The graph above comes from the Australian Bureau of Statistics from the June quarter national accounts 2021

Focus on the time frame from around June 2013 until June 2019. You can see that the household savings ratio varies between around 5ish to 9ish per cent (very precise!). This means that, on average, for every $1 of income households earn, they are saving somewhere between 5 and 9 cents. They’re generally spending MOST of their incomes.

Now focus on March of 2020 — see how the savings ratio spikes? This was the first wave of COVID-19 and consumer confidence plummeted. How did consumers respond? By saving a larger chunk of their incomes. In fact, in the June quarter of 2020, the household savings ratio rose to 22 per cent — meaning households were now saving 22 cents for every $1 they earned.

This all comes down to consumer confidence. When the economy is going well, consumers feel confident in the future. They feel confident to spend their money because they believe that the good times will continue and their ability to earn income, to continue spending, will, well, continue! 

(You could also think about how their marginal propensity to consume would be higher during ‘good’ economic conditions).

When consumers fear for the future, such as during the height of the first wave of the pandemic, they’ll reduce spending. They don’t know what the future holds. They want to hang on to their funds because they are unsure whether they can continue to earn the same level of income.

(You could think here about how the marginal propensity to save would be higher.)

I’ve annotated the above chart to summarise this info.

I think the household savings ratio is an extremely important statistic. It gives us, as economists, a good indication of consumer confidence. This also has implications for economic growth. This is because savings is a leakage and represents a withdrawal of funds from the economy. The higher the level of saving, the lower the level of consumption, which will put downward pressure on GDP.

I’ve also got a video on the topic you can check out below.

Australia’s economic data is released when?

In Australia, key economic data is released throughout the year. By understanding Australia’s economic data calendar, you can be aware of when key data will drop and then incorporate that consistently into your responses.

I tell you this: the use of current (and correct) economic data is extremely important in allowing you to access higher marks in Eco exam situations.

The best source I’ve found for this is Trading Economics.

(If you’ve got trouble only getting Aussie info to appear, or if the timezones are out of whack, try this:  select the calendar tab, then countries and make sure only Australia is selected.)

Now you can see the pattern of how economic data is released in Australia. For example, in October 2021, on Tuesday 5 October we get some heavy hitting data:

  • Balance of trade (Balance on goods and services — the comparison between the value of exports and the value of imports)

  • Monthly change in exports and imports

  • Monthly retail sales data (extremely important as it is a vital part of consumption)

  • Reserve Bank of Australia’s (RBA) cash rate decision

A snippet of the eco data goodness being released in October 2021

A snippet of the eco data goodness being released in October 2021

Trading Economics shows you what the last result was (“previous”) and the “consensus” view which relates to the average of what economists think the result will be. 

You can also start to see the longer-term patterns of when data is released. For example, on 28 October, we get the latest read on inflation data. You can see that it is QoQ (quarter on quarter) and YoY (year on year). And you can see that the previous yearly rate was 3.8% (with a forecast of 2.8%) while the last quarterly rate was 0.8% (with a forecast of 0.7%). The forecasts are done by Trading Economics, while the consensus comes from market economists.

You can also see that on the same day we get the RBA’s own measures of inflation — trimmed mean and weighted mean. This helps the RBA develop its core measures of inflation, which strip out one-off changes and help to give the underlying trend in prices. 

One practical way to use this info is to list the key dates in your calendar so you’re reminded when the last eco data releases.