Consumer savings can stimulate economic growth through a number of channels. The primary reason is that disposable income leads to more spending, which naturally leads to economic growth.
When consumers have discretionary income, they are more likely to spend it on goods and services, which drives demand and contributes to economic development.
On the other hand, consumer savings can also have an inverse relation with economic growth as a high savings rate could mean less consumption, which may lead to a lower gross domestic product (GDP). For example, if consumers save too much, it can lead to a decrease in demand for goods and services, which can slow economic growth, hence, a balance between savings and consumption is essential to ensure a healthy and stable economy. The pandemic was/is a prime example of such financial instability.
While some individuals and households may have saved more due to reduced spending on travel, dining out, and other non-essential expenses, the effects of the pandemic on the economy have been severe, with many businesses shutting down and unemployment rates rising significantly. The government has implemented several measures, such as government stimulus payments, and increased employment insurance benefits to help mitigate the economic impact, but it’s still uncertain how long it will take for the economy to fully recover. There is hope for an economic upturn, as some experts believe that the high savings rate during the pandemic could be useful in the long-term recovery process because it provides funds for investment and consumption once the economy starts to recover.
As stated above, consumer savings boost economic growth in many ways, but today we’ll focus on the Top Ways Consumer Savings Stimulate Economic Growth.
- Consumer savings can help the government to have a more stable financial position
Having a high savings rate can help the government to have a more stable financial position, which can be used to stimulate the economy during downturns.
When consumers save, they are less reliant on government safety net programs, which can help reduce government spending and stabilize the country’s fiscal position. This can provide the government with more flexibility to stimulate the economy during downturns, through measures such as tax cuts or increased spending on infrastructure projects, as well as attract foreign investors.
- Consumer savings can attract foreign investment
A high savings rate and a stable fiscal position attract foreign investors because investments represent a strong, stable, and resilient economy. It’s also important to note that countries whose national savings rates are high may not be dependent on foreign direct investment (FDI); consequently, the risk arising from volatile FDI decreases significantly (the country’s economy is less affected by changes in global economic conditions or the decisions of foreign investors). These countries have a large domestic pool of savings that can be used for investment, therefore with a high savings rate, these countries can finance their investments and development projects, which reduces the need to rely on foreign capital.
Then again, a country with a high savings rate may still choose to attract FDI to supplement its savings, access new technology, or gain access to new markets. The US, France and China are examples of developed countries with high savings rates; however, they are not completely “self-sufficient,” as they still depend on other factors such as trade, tourism, and remittances.
- Consumer savings can reduce inflation
A high savings rate can reduce the pressure on the economy by reducing the demand for goods and services, which can help keep inflation in check. The unstable housing market is a clear case in point.
Consumer savings can help stabilize the housing market by enabling individuals to accumulate down payments for home purchases. A healthy housing market contributes to economic stability and growth. Additionally, high savings rates can reduce the pressure on the central bank to increase interest rates to curb inflation.
- Consumer savings can promote business growth and innovation
Consumer savings can promote business growth and innovation by providing businesses with access to capital that they can use to expand and grow. This can include funds for new product development, marketing, hiring new employees, and investing in new equipment or technology. This investment in productive assets leads to job creation and economic growth.
Consumer savings can also provide funds for investment in productivity-enhancing technologies, equipment, and training, which can help to increase output and keep prices low. This can help businesses to be more efficient and increase their competitiveness.
Susan Gebrezgie | Contributing Writer