25 Year High Savings Rate

Australia’s Household Saving Rate is at a 25 year high, reflecting weak house and equity asset prices, low consumer confidence and relatively high Term Deposit rates. Whilst sluggish house prices and global uncertainty are likely to keep the Saving Rate high, a rebound in the equity market and lower TD rates should shift Saving toward equities. This should be a self-reinforcing positive for equities.

Since the Global Financial Crisis, Australian Households have significantly increased their saving. Indeed, the Household Saving Rate has risen from negative levels in 2002-05 and 2-4% in 2006-08 to double-digit levels, the highest level since the mid-1980’s. In Morgan Stanleys  view, this reflects a combination of negative wealth effects from soft house prices and equity markets, cautious consumer confidence and relatively high Term Deposit interest rates. Reflective of these factors, the lion’s share of the saving is going into bank Term Deposits.

Looking ahead, lower official interest rates and stronger bank balance sheets should drive Term Deposit rates below 5%. Over time, this should encourage a positive shift in the share of saving flowing into the equity market.