What saving means for the economy
07 July 2016, 10:59
Johannesburg - Higher savings do not guarantee higher economic growth, but they are certainly a key ingredient to eventually have a higher economic growth rate, according to Rian le Roux, Chief Economist at Old Mutual Investment Group.
In an interview with Fin24 le Roux said a higher savings ratio is necessary to finance investment. This in turn should generate faster economic growth, which will stimulate job creation which will inevitably lead to more savings as more people find jobs and companies make more profits that they can plough back into their companies.
The opposite is also true and a particular danger for South Africa. A sustained low national savings rate could translate into a “vicious circle”. A lack of sufficient savings will lead to a low level of investment, leading to weak economic growth, lower job creation and higher dependency ratios, and ultimately even less saving and investment, he explained. With the economy not growing fast enough, more people are dependent on others for their living expenses. “Children are more dependent on their parents for longer and parents become dependent on children,” he said.
The current savings ratio (including savings from households, companies and government) is 16% of national income. Investment is higher at 21%, said le Roux. The 5% gap is currently financed by capital inflows through foreign investment. The problem is that capital inflows can be "fickle" and if foreigners decide to withdraw their investments or invest less the gap will have to be financed by other means, such as a lower level of investment in the economy. Driving investment lower requires higher interest rates and causes slower overall economic growth, he explained.
“Fundamentally it is important as a nation to save more so that over the longer term we are not as dependent on foreigners. We need to finance our own investments over time.”
Challenges to saving
Many South Africans are unable to save, because they do not have enough income. For the others who can save, the obstacle is to take an active decision to do it, explained le Roux. This is partly because we are such a strong consumption orientated society and seek instant gratification. With saving, the benefit is normally far in the future.
People also often save too little. Over the past 30 years returns on formal investment were high, so many current retirees who saved too little were "saved" by high investment returns. These high returns are unlikely to be repeated in future. “If investment returns are lower, people will have to save more to be able to retire comfortably,” explained le Roux.
Each person should understand their future liabilities, to determine how much they should be saving today.
AUDIO: Interview with Old Mutual's Rian le Roux