More savings in Germany

The environment for private household investment in Germany remains difficult. While the ECB’s announcement in September last year that it would phase out its net bond purchases in stages still raised hopes that the low-interest phase would subside, these hopes evaporated again at the turn of the year. With the slowdown in economic growth in Germany and Europe and the intensification of the trade conflict between the USA and China, monetary policy normalization receded into the distance. The average current yield on fixed-interest securities has been falling for months – with a negative sign since June. While expansive monetary policy and low interest rates are pushing up demand for equities as an investment alternative, trade disputes and a gloomy economic outlook are weighing on the sales and earnings prospects of listed companies. This limits price potential and increases volatility.

In the first quarter of the current year, private households once again put a higher proportion of their disposable income on the high end. This is a continuation of a trend observed since 2014, which should intensify next year with a noticeably slower growth in private consumption. We expect the savings ratio to rise to 10.7 per cent of disposable income in 2020.

On the one hand, private investors are understandably unwilling to invest in long-term fixed-interest forms of investment at extremely low interest rates. On the other hand, many Germans traditionally tend to be risk averse and avoid equities when investing money. They therefore park a large part of their financial assets permanently on their current account or as cash. At present, almost two thirds of all new investment funds flow into these channels. The result is a gigantic backlog of investments. Cash and demand deposits now account for 26.7 percent of total financial assets. In addition, the elimination of the compound interest effect is slowing asset accumulation. The fact that the financial assets of private households will nevertheless remain extremely stable at almost 6.8 trillion euros by the end of 2020 is a sign of the economic recovery. The fact that the euro is likely to grow is mainly due to high savings.

Since 2008, the interest rate on deposits, bonds and insurance has been falling steadily. In 2018, the average nominal interest rate on these forms of investment after taxes and administrative expenses was only around 0.75 percent. With an inflation rate of 1.85 per cent, this results in a negative real interest rate of just over one per cent. This corresponds to a loss in value of around 50 billion euros for the financial asset components concerned. Although the inflation rate is likely to be somewhat lower this year and next, the real interest rate will remain negative for the foreseeable future.

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