Spend less, save more

Megan Saxton - June 09, 2009

Saving rates are changing to deal with economic crisis. They may never go back

A new trend in consumerism is emerging that many economists believe will continue long after our current economic crisis is resolved. After years of spending more than they earn, Canadians are beginning to spend less and save more.

Many consumers are being forced to change their spending habits, after watching the values of their homes and investments plummet. For others, it’s a moral shift as people are starting to realize the conspicuous consumption of the past decade isn’t adding much value to their lives.

The past decade was one of unsustainable splurging, as easy access to credit cards and home equity loans enabled consumers to live more lavishly than previous generations. The “entitlement generation” racked up debt and lived off tomorrow, acting as if the bill would never come due. As the economy has contracted, consumers have been forced to rethink their spending patterns, and in many cases, make significant changes.

Shift back to thrift

While this shift back to thrift is a healthy change for a consumer class known for spending more than it earns, it has multiple repercussions on the economy. The retail landscape, for example, has changed forever, with people now asking themselves how many jeans, shoes, cars, TVs, they really need. Even purveyors of high-end merchandise are feeling the impact. According to a new report by business consulting firm Bain and Co., the luxury goods market is expected to face its first recession in six years, as exchange rate fluctuations and economic turbulence eat into the confidence of many luxury consumers. The study predicts as much as a 7% decline in global luxury sales for 2009.

The fallout is obvious. When consumers refuse to spend, companies cut back, layoffs arise, people scrimp even more and the recession continues. Recessions provoke fear of job losses and anxiety over housing and stock declines. The typical reaction is for consumers to squirrel away more of their pay cheques to build a safety net.

Over the last 12 months, the savings rate in Canada has risen to a six year high of 4.7%, up from 1.9% the previous year. While an increase in savings happens in nearly every recession, the effect is usually fleeting. Once the economy recovers, consumers revert to more spending and less saving.

Spending habits change

This time is expected to be different. Some experts predict a permanent cultural shift in spending habits. Consumers have been so shaken by how fast their wealth has shrunk, and so overwhelmed by credit card debt, they might not resume their robust spending for years, if ever. As a result, people are learning to live within their means.

Consumers who have lost a significant portion of their net worth in the housing and stock markets are now starting to channel more of their earnings towards savings. They realize forms of easy credit that were once prevalent, like mortgages with no down payments, may not return, either because the government regulates them out of existence or because banks dare not venture back into such risky lending. That means if someone wants to buy a house, they will have to do it the good old-fashioned way – by saving more and borrowing less.

Whether for reasons moral or otherwise, consumers are already thinking a bit differently about their long-term budgets. People are starting to prioritize more and perhaps save longer for larger purchases. This recession has reminded Canadians of the risks of saving too little and borrowing too much.

Despite the immediate jolt to the economy, increased personal savings would be a positive step in the long run. More savings leads to more investment, which promotes economic growth and leads to better living standards. The end result could be a healthy trend for both households and the financial system.