Monday, 31 October 2016

Eurozone Firms Defy ECB’s Incentives to Spend and Invest

In World Economy News 31/10/2016

Eurozone firms are socking away increasing amounts of money despite the European Central Bank’s effort to encourage businesses spending and investment by slashing interest rates below zero.
ECB data published Friday show the net savings rate of nonfinancial corporations surged to 6.7% of their net income in the second quarter, a multiyear high and up sharply from 6.1% in the previous three months. Nonfinancial investment by such firms remained steady at 3.5%, where it has hovered for two years.
The data underscore the risk that, rather than encouraging consumers and businesses to open their wallets, the ECB’s subzero interest rates and other unorthodox policy tools may be causing them to squirrel more away.
Eurozone household saving in the second quarter hit 12.8%, its highest rate since late 2011, according to the European Union’s statistical office, Eurostat.
Taken together, the net savings rate of eurozone households, businesses and governments rose to 6.9% of net disposable income in the second quarter, compared with 6.1% a year earlier, according to ECB data.
That change was driven by nonfinancial corporations, whose net savings rate has risen by about 40% since the ECB cut interest rates below zero.
ECB executive board member Yves Mersch warned on Thursday that a recent rise in savings rates in many euro area countries, including France and Germany, “demands our attention.”
“Such a development would lead to even lower interest rates, as ever more savings would compete for ever fewer investment opportunities,” Mr. Mersch said in a speech in western Germany. “Greater risks of deflation could ensue.”
Policy makers in Europe and Japan have turned to negative rates to stimulate their lackluster economies. The ECB cut interest rates below zero in mid-2014 and has since doubled down on that policy, taking a key rate to minus 0.4% in March.
Lower interest rates in theory should encourage consumers and businesses to spend by reducing returns on savings and safe assets such as government bonds. Penalty rates on savings, which some businesses are forced to pay, should act as a further incentive for them to spend.
Additional spending should create demand for goods, boosting economic growth and lifting inflation rates.
However, some economists and bankers have warned that negative rates signal concerns over the growth outlook and the central bank’s ability to manage it. That means firms might be more conservative in their spending. The latest ECB data appears to support that view.
Michael Heise, chief economist at insurer Allianz SE, warned on Friday that the ECB’s current policies were ineffective and were instead sewing anxiety.
“Saving is not going down, it is slightly trending up,” Mr. Heise said at a conference at Frankfurt’s Goethe University.
“That is peculiar because saving is so unattractive,” partly due to the ECB’s policies, he said.
According to data from Germany’s central bank, German nonfinancial businesses have saved more than they have invested for the past seven years, piling up about EUR455 billion ($500.4 billion) in cash and deposits. Executives blame their reticence on a weak global economic outlook, regulatory uncertainties and geopolitical risks.
In his speech, Mr. Mersch warned that the greatest risk in the current environment was that “the expectation of lower growth in the future can lead to lower investment and excessive saving today.”

Source: Dow Jones