Household financial assets have increased in most eurozone countries quite substantially since 2003 – the financial and euro crisis notwithstanding. Basically, there are two growth drivers: Fresh savings and value gains, triggered, for example, by rising equity or bond prices. The growth composition differs significantly between countries. Whereas in Ireland more than 90% of asset growth was driven by value gains, in Germany, it was a mere 7%. On average, 41% of asset growth is accounted for by value gains.
Thus, around 60% of asset growth is the result of fresh savings. Basically, these savings can come either from investment or earned income. Using investment income is the smarter way: Received interest or dividends are used for buying new financial assets, sometimes even automatically (e.g. funds with retained earnings). And if the investment income is bigger than desired savings, part of that income can be used to prop up consumption. On the other hand, if desired savings exceed investment income, part of the earned income has to be used to close this “savings gap”. As a consequence, less earned income is available for consumption. Summarizing aptly: Money can work for you (investment income larger than desired savings) or you have to work for the money (desired savings larger than investment income).
Looking at the eurozone countries, it becomes evident that households in only two countries have to use earned income to close their savings gap: Austria and Germany. Whereas in the former, relatively low property income is to blame, in the latter, the high savings rate (i.e. high desired savings) plays a key role. In all other countries, households can use investment income to prop up consumption, first and foremost in the Netherlands.
Considerable savings efforts out of earned income are a way to compensate for low asset yields, i.e. they make up for the lack of investment income and value gains. This is clearly backed up by the data: Apart from crisis-hit Greece, Germany and Austria report the lowest asset yields, namely 2.8% and 2.9% respectively for the period since 2003.
What are the reasons for these poor returns? A comparison between Spain (asset yield of 5.1%) and Germany (2.8%) is very revealing in that respect. Both countries saw a very similar increase in financial assets of around 70% per capita since 2003. However, in the case of Germany, a quarter of the increase stems from savings out of earned income; in contrast, the situation in Spain: Households don’t touch their earned income for savings but instead use half of their investment income for consumption. These stark differences can be attributed to different savings behaviors as reflected by the portfolio mix. In particular, one number stands out: German households’ portfolio share of equity (listed and unlisted) is 7%; in Spain, this share is more than three times as high (22%).
High or low value gains, high or low investment incomes: it all depends on savings behaviors. German households’ conservative savings mentality is not only detrimental for investment income – in particular in a zero interest rate environment – but also for value gains: Lower equity exposure simultaneously deprives German savers of the chance to pocket higher, interest rate-independent investment income as well as to participate in higher value gains.
Bottom line: Financial assets can grow even in a zero interest rate environment. There are two ways in which this can happen: Either savers generate high returns by focusing their investment behavior more on the capital markets, or they inject more of their earned income into savings. It is a choice between smart and hard saving.