CONSUMER CONFIDENCE AS A DETERMINANT OF HOUSEHOLD PROPENSITY TO SAVE

Transcription

1 CONSUMER CONFIDENCE AS A DETERMINANT OF HOUSEHOLD PROPENSITY TO SAVE ANETA MARIA KŁOPOCKA PHD., LECTURER, UNIVERSITY OF FINANCE AND MANAGEMENT IN WARSAW,POLAND anetaklopocka@poczta.onet.pl Abstract The following paper elaborates on the significance of saving for the financial stability. The changes in the propensity to save of households in Poland between are discussed. A regression analysis was carried out in order to test the influence of changes in consumer confidence on the household saving rate. It has been demonstrated that a change in consumer confidence for the positive has a negative impact on the saving rate and a change for the negative contributes to a greater propensity to save. Keywords: Households, propensity to save, household saving rate, consumer cofidence, financial stability JEL Classification: D91, E21 The author gratefully acknowledges the comments and suggestions of the ECOTREND2013 conference participants at the Constantin Brâncuşi University of Târgu Jiu. 1.Introduction Difficulties of the global economy in the recent years have demonstrated the significance of financial stability of households for the processes of sustainable growth. In the light of the financial crisis initiated on the American market and collapse of the dynamics of the development of many domestic economies, household consumption and saving processes have become a topic for lengthy discussions in the literature. The major objectives of the following paper are: stressing the significance (necessity) of saving for the financial stability of households, considering changes in the propensity of Polish households to save, and analysing the influence of the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation over their propensity to save. The following paper presents selected results of a research project entitled: Directions of changes in household saving behaviour international perspective. The project was funded by the National Science Centre (Poland); the funds were granted on the basis of a decision No. DEC-2011/01/B/HS4/ Economic security of households In the years preceding the financial crisis, the indebtedness of households, as measured by the ratio of debt to personal disposable income (household leverage), has dramatically increased in many developed countries. In 2007, this ratio reached the highest point in the history of the United States, i.e. 133%. A broad array of co-existing factors, such as low interest rates, weak lending standards, increase in real estate prices, development of securitization, etc., have contributed to the increase in the indebtedness of households. Much of the run-up in debt was mortgage-related. The substantial increase in indebtedness was accompanied by a constant decrease in the saving rate. Combination of the increasing indebtedness with the decreasing saving rate facilitated greater dynamics of consumption than disposable income and had a stimulating effect on economic growth [FRBSF 2009]. Nonetheless, as demonstrated by A. Mian, K. Rao, and A. Sufi [2013], high level of indebtedness of households combined with a collapse in real estate prices was the main factor causing a grievous decline in consumption between 2006 and It has long been pointed out [Rytelewska 2005, pp ] that excessive development of credit may lead to an economic collapse, deepen and prolong economic contraction and preserve the business cycle. Furthermore, the most recent analyses of empirical data [IMF 2012, pp ; Glick, Lansing, 2010] suggest that the larger the increase in indebtedness of households followed by the fall in real estate prices, the more dangerous the consequences in a form of: a decline in consumption of households, increase in unemployment, and decrease of the real GDP. 13

2 Appropriate formulation of household balance sheets is important on a macroeconomic scale as well as from the perspective of individual entities. It protects households against possible insolvency and its adverse socioeconomic consequences. Household savings play a major role in this matter. By means of saving, households demonstrate their preferences in terms of intertemporal choice and allocate consumption in time, and what is more they reduce (or increase in the case of negative net savings) exposure to liquidity risk. Browning, Lusardi [1996, pp ] accentuate the existence of considerable heterogeneity in the motives for saving. It is unlikely that a single explanation will suffice for all members of a population at any given time or even for the same person over a long stretch of time. Moreover, many of the motives are complementary. For example, households that save for retirement (the life-cycle motive) will also built up financial reserves that can be used to buffer pre-retirement income and consumption shocks. Thus savings have a clearly positive influence on the economic security of households. Lusardi, Schneider, Tufano [2011, pp ] have demonstrated that households own savings are the resource used most often to deal with shocks (but resources of family and friends, formal and alternative credit, increased work hours, and sale of possessions are also used frequently, especially among some subgroups). They also find evidence suggestive of a pecking order of coping methods, with savings first in line. 3. Household propensity to save in Poland Panek, Białowolski, Kotowska, Czapiński, [2013, pp ] provide empirical evidence on the importance of the precautionary motive for Polish households it explains a sizeable part of wealth holdings in Poland and is the most prevalent objective of saving. The research project Social Diagnosis [Diagnoza Społeczna] 1 carried out in the year 2000 showed that as much as 79 per cent of households accumulating savings declared that they save in order to build up reserves for unexpected circumstances. In the following years, the percentage of households saving for precautionary motive decreased to 60 per cent in 2011 but increased up to 67 per cent in 2013 (Figure 1). During the whole period of analysis, the precautionary motive was given much more often than any other motive. Panek, Białowolski, Kotowska, Czapiński, [2013, pp ] estimated that savings for building up reserves for unexpected circumstances constituted 18 per cent of all savings in Figure 1. Household saving motives in Poland ( ) precautionary motive retirement current consumption vacation medical treatment housing repairs children needs consumer durables regular payments other motives rehabilitation not defined purpose purchase of enterprise motive % Social Diagnosis is a comprehensive research project taking into account the condition and quality of life in Poland as reported by the Polish themselves. Measurement of the condition of life involves, among others, studying the manner of allocating income by households. This is panel research. All available households studied in the previous test rounds take part in the successive rounds as well as households from a new representative sample. Seven test rounds have been carried out by now: in 2000, 2003, 2005, 2007, 2009, 2011, and In 2013, households with members were studied and of these members of 16 years old or more were tested individually. The total number of households tested in all the seven rounds amounted to 23804, with members and individual respondents. More information about the research methodology is available at: [Panek, Czapiński, Kotowska, 2013]. 14

3 Source: Panek, Białowolski, Kotowska, Czapiński, 2013, pp It must be noted, however, that the share of households with accumulated savings was low for the whole period but had a clear tendency to increase (in %, in %). In 2013, only nineteen per cent of households accumulated savings exceeding a 6-month income. Kośny, Piotrowska [2013, pp. 1-71] revealed that in these circumstances, the main factor affecting economic security of households in Poland is the stability of employment and income. The increase in the share of households with accumulated savings did not contribute to a rise in the saving rate. On the contrary, there was a long-term downward trend in the household net saving rate in Poland (and in the United States likewise) from over 16 per cent in 1995 to a value below zero in 2008 [OECD, 2012]. In the first decade of this century, when interest rates on global financial markets had been historically low and mortgage loans had been available in foreign currencies, indebtedness of households for housing purposes soared also in Poland. High dynamics of the demand for real estate caused an increase in its prices, which, by means of wealth effect and credit channel (an increase in the value of collateral) just as in the USA led to a reduction in the savings rate. The other factors exerting an adverse influence over the propensity to save were: tax arrangements, decrease in interest rates, and lenient credit policy of banks as all of them contribute to the increase in indebtedness of households for consumption purposes and lower the motivation to save. The lessening of financial constrains such as liquidity and down payment constrains decreased households need to save before major purchases. Since the year 2008, real estate prices on the primary and secondary market in Poland have started to fall (though at a much slower pace than in the USA) as a result of limitations of the demand and the surplus of unsold properties. As a consequence of the economic slowdown, households became much more cautious: fear of unemployment became deeper, evaluations of the prospects for the domestic economy and the state of personal finances became more negative [Kłopocka 2009, pp ]. These circumstances accompanied a hike in the household saving rate that has occurred (Figure 2). Figure 2. Household net saving rate in Poland (as a percentage of household disposal income) % Source: OECD, Household net saving rate Methodology and data In the further part of this paper, regression analysis is presented, which was carried out in order to establish the relationship between the propensity to save of households and consumer confidence with the use of mathematical models. The time horizon in the analysis was determined by availability of data and is the period between 1997 and In this paper, the household net saving rate, i.e. the relation between savings and net income of households, was employed as an index of households propensity to save. Data on this matter were obtained from the databases of OECD. Two composite indexes of consumer confidence (current and forward consumer confidence indexes) and their components (estimated by the Central Statistical Office as part of research in cooperation with the National Bank of Poland) were adopted as independent variables describing consumer confidence. The two composite indexes of consumer confidence are as follows: 1. Current Consumer Confidence Index (CCCI) indicating the sentiment of consumers based on their opinions on the financial condition of their own household, domestic economy, and conditions for making important purchases. The index takes values between -100 and 100, a positive value signifies that the majority of subjects has a good opinion on their own and the economy s condition, however, a negative value points to a higher number of subjects holding an opposing view. 15

4 2. Forward Consumer Confidence Index (FCCI) represents the predictions of consumers concerning changes in the financial condition of their households and the Polish economy in the next twelve months. The index takes values between -100 and 100, a positive value signifies that the majority of subjects is optimistic about the changes that will occur in the next twelve months, however, a negative value points to a higher number of subjects holding a pessimistic view. The values of composite indexes are estimated with the use of values of component indexes which are numerical entries of responses to particular questions. The values of component indexes are estimated by multiplying the percentage of responses to a given option in a question by its weight and adding up the products. The questions taken into consideration at estimation of the indexes: CCCI and FCCI along with the weights of the options are provided in table 1. Table 1. Questions from a questionnaire concerning consumer confidence in Poland used for the purpose of estimation of the CCC and FCC indexes Symbol of the Question Response option Weight component indexes I1 How has the financial condition of your It is much better 1.0 household changed in the last 12 months? It is slightly better 0.5 It has remained the same 0.0 It is slightly worse -0.5 It is much worse -1.0 I2 I3 I4 How do you expect the financial condition of your household will change in the next 12 months? How do you evaluate the changes in the general condition of the economy in the last 12 months? How do you expect the general condition of your country s economy will change in the next 12 months? I7 How do you expect the level of unemployment in your country will change in the next 12 months? I8 I11 Source: GUS 2004, pp Taking into account the general condition of the country s economy, do you think now is the right time for people to make important purchases? How likely do you think it is that in the next 12 months you will save any sum of money? It will be much better 1.0 It will be slightly better 0.5 It will remain the same 0.0 It will be slightly worse -0.5 It will be much worse -1.0 It is much better 1.0 It is slightly better 0.5 It has remained the same 0.0 It is slightly worse -0.5 It is much worse -1.0 It will be much better 1.0 It will be slightly better 0.5 It will remain the same 0.0 It will be slightly worse -0.5 It will be much worse -1.0 It will increase considerably 1.0 It will slightly increase 0.5 It will remain the same 0.0 It will slightly decrease -0.5 It will decrease considerably -1.0 Yes, now is the right time 1.0 It is neither the right nor a bad 0.5 time No, it is not the right time -1.0 Very likely 1.0 Quite likely 0.5 Unlikely -0.5 Absolutely unlikely -1.0 The mathematical equation of the CCCI is as follows: 16

5 (1), where I1, I2, I3, I4, I8 are empirical values of component indexes from table 1. The mathematical equation of the FCCI is as follows: (2), where I2, I4, I7, I11 are empirical values of component indexes from table 1. The values of customer confidence composite indexes (CCCI, FCCI) and of component indexes (I1, I2, I3, I4, I7, I8, I11) are presented in table 2. Table 2. The customer confidence composite and component indexes in Poland ( ) Year I1 I2 I3 I4 I7 I8 I11 CCCI FCCI , , ,4-51,4-13,8-21, ,6-19,2-22, ,3-16, ,8-29, ,3-25,3-37,9-29,7-53, , , ,6-26,8-45,8-29, ,8-60,1-33,7-44, ,7-25,8-51,8-32, ,8-60,1-35,5-46, ,6-27,8-52,9-35,1-63,8-32,1-64,6-37,5-47, ,1-24,5-51,7-35,2-54,1-29,4-65,4-35,8-44, ,1-22,3-49,5-30,8-30,3-23,3-58,8-31,8-35, ,5-16,7-24,8-16,4-54,6-22,1-27, ,2-6,1-26, ,3-11,1-48,3-14,9-18, ,9-1,9-17,7-6,6 17,6 1,3-40,7-7,1-7, ,6-4,5-16,6-9,7 5,1 1,2-37, , ,1-11, ,5-54,6-16,1-37,1-22,3-32, ,2-8,2-31,2-18,9-34,4-9, ,9-23,5 Source: Figure 3 shows the changes in household saving rate versus customer confidence indexes in Poland in the period between 1997 and Figure 3. Household saving rate versus customer confidence indexes in Poland ( ) Household net saving rate I1 I2 I3 I4 I7 I8 I11 CCCI FCCI 17

6 Source: OECD, 2012; 5. Results The results of simple linear regression analysis for all the composite and component indexes are provided in tables 3-5. Generally, there is a statistically significant relation between the household saving rate and the indexes of consumer confidence. However, in the case of indexes: I3, I4 and CCCI, the influence of changes in these independent variables on saving rate cannot be confirmed on the basis of the performed analysis. The highest influence on household saving rate is exerted by indexes I1 and I2 which are directly related to the financial situation of a household. According to the simple linear regression with I1 as the independent variable, 39 per cent of variation in the household saving rate is accounted for the evaluation of the current financial condition of a household (I1). According to the simple linear regression with I2 as the independent variable, fluctuations in evaluation of the future condition of a household (I2) explained 37 per cent of variation in the household saving rate. Thirty-six per cent of the variation in the dependent variable was explained by a model where the independent variable was the evaluation of the buying climate (I8). Variation in the household saving rate were to a slightly smaller extent (34% and 33%) explained by equations with FCCI and I7 as independent variables, respectively. The results imply that households save less, if they expect their financial situation to improve, and that higher income risk is positively associated with saving. This stands in agreement with findings of other authors who studied the influence of the degree of optimism that consumers feel about their household financial situation and the overall business climate on consumption, saving or debt accumulation. Table 3. Regression Statistics I1 I2 I3 I4 I8 CCCI I7 I11 FCCI Multiple R 0, , , , , , , , , R-squared 0, , , , , , , , , Adj R- 0, , , , , , , , , squared Std. Err. 2, , , , , , , , , Number of obs Source: own calculations. Table 4. ANOVA df SS MS F SIGNIFICANCE I1 Regression 1 59, , , , Residual 12 93, , I2 Regression 1 57, , , ,02008 Residual 12 95, , I3 Regression 1 8, , , , Residual , ,06249 I4 Regression 1 21, , , , Residual , ,93596 I8 Regression 1 55, , , , Residual 12 97, , CCCI Regression 1 37, , , , Residual ,416 9, I7 Regression 1 50, , , ,

7 Residual ,0547 8, I11 Regression 1 45, , , , Residual ,3601 8, FCCI Regression 1 52, , , , Residual ,2615 8, Source: own calculations. Table 5. Coefficients Coefficients Standard Error t Stat P-value I1 Intercept 2, , , , I1-0, , , , I2 Intercept 4, , , , I2-0, , , ,02008 I3 Intercept 5, , , , I3-0, , , , I4 Intercept 4, , , , I4-0, , , , I8 Intercept 4, , , , I8-0,1987 0, , , CCCI Intercept 3, , , , CCCI -0, , , , I7 Intercept 5, , , , I7-0, , , , I11 Intercept -1, , , ,76753 I11-0, , , , FCCI Intercept 2, , , , Source: own calculations. 6. Conclusions FCCI -0,1531 0, , , The financial crisis in the last few years has emphasised that households consumption and saving decisions should play a central role in financial stability analyses. Appropriate formulation of households balance sheets improves financial security and helps to overcome income and demand shocks. The literature on the subject often presents psychological circumstances surrounding the processes of saving. Thus, the following paper elaborates on the changes in the propensity to save of households in Poland between A regression analysis was carried out in order to test the influence of changes in consumer confidence on the household saving rate. It has been demonstrated that a change in consumer confidence for the positive has a negative impact on the saving rate, and a change for the negative contributes to a greater propensity to save, especially out of a precautionary motive. Further empirical research is desirable, in particular at the microeconomic level into how households expectations influence their consumption and saving decisions. 7.Bibliography [1] Browning M., Lusardi A., Household Saving: Micro Theories and Micro Facts, Journal of Economic Literature, Vol. 34, No. 4, Dec., [2] FRBSF, U.S. Household Deleveraging and Future Consumption Growth, FRBSF Economic Letter, No. 16,

8 [3] Glick R., Lansing K. J., Global Household Leverage, House Prices, and Consumption, FRBSF Economic Letter, No. 1, [4] GUS, Badania koniunktury. Koniunktura konsumencka. Tendencje zmian październik 2003-styczeń 2004 [Business outlook studies. Consumer confidence. Trends, October 2003-January 2004], Warsaw [5] IMF, Growth resuming, dangers remain, World Economic Outlook, April [6] Kłopocka A., Wpływ kryzysu na zmiany w procesach oszczędzania gospodarstw domowych, Uniwersytet Szczeciński, Zeszyty naukowe nr 548, [The influence of crisis on the household saving behavior, Research Magazines of Szczecin University No. 548], [7] Kośny M., Piotrowska M., Economic security of households and their savings and credit, NBP Working Paper No. 146, Warsaw [8] Lusardi A., Schneider D., Tufano P., Financially Fragile Households: Evidence and Implications, Brookings Papers on Economic Activity, Spring 2011, [9] Mian, A. R. and Rao, K. and Sufi, A., Household Balance Sheets, Consumption, and the Economic Slump, Chicago Booth Research Paper No ; Fama-Miller Working Paper (June 7, 2013). Available at SSRN: or [10] OECD (2012), [11] Panek, T., Białowolski, P., Kotowska, I.E., Czapiński, J., Warunki życia gospodarstw domowych. Zasobność materialna. Diagnoza Społeczna 2013 Warunki i Jakość Życia Polaków - Raport. [Households condition of life. Material status. Social Diagnosis 2013, Condition and Quality of Life in Poland Report.] [Special issue]. Contemporary Economics, 7, DOI: /ce [12] Panek, T., Czapiński, J., Kotowska, I. E., Metoda badania. Diagnoza Społeczna 2013 Warunki i Jakość Życia Polaków Raport. [Research methodology. Social Diagnosis 2013, Condition and Quality of Life in Poland Report.] [Special issue]. Contemporary Economics, 7, DOI: /ce [13] Rytelewska G., Bankowość detaliczna procesy oszczędzania i kredytowania gospodarstw domowych w: G. Rytelewska (red.), Bankowość detaliczna [Retail banking saving behaviour and crediting of households in: G Rytelewska (ed.), Retail banking], PWE, Warsaw [14]