Download PDF Download

Spotlights
AWASH WITH CASH:
CORPORATE EXCESS
SAVINGS IN G-7
COUNTRIES
The corporate sector in the G-7
countries has moved from being a
net borrower to a substantial net
saver in recent years. It has followed the earlier move by emerging market economies to a net
saver status after the Asian financial crises of the late 1990s. Taken
together, these developments have
substantially altered the financial
landscape of the global economy.
According to the IMF1, these
changes are one factor behind the
relatively low level of long-term
interest rates at present.
NONFINANCIAL CORPORATE SECTOR
Percent of GPD
Germany
Japan
24
6
20
2
0
16
-2
6
-2
12
-6
4
-4
2
-6
8
-10
14
6
12
4
10
2
8
0
-8
1990 1992 1994 1996 1998 2000 2002 2004
4
1980
1985
United Kingdom
14
1990
1995
2000
-14
2005
United States
4
12
2
10
0
8
-2
6
-4
4
-6
1970 1975 1980 1985 1990 1995 2000 2005
11
2
10
1
9
0
8
-1
7
-2
6
-3
5
-4
1970 1975 1980 1985 1990 1995 2000 2005
Gross saving
Capital spending
(left scale )
(left scale)
Net lending/Borrowing
(right scale )
Source: Eurostat; national authorities; IMF calculations.
What are the reasons for this
change in behaviour of G-7 corporations? For the non-financial corporate sector,
the IMF arrives at the following explanations:
The IMF concludes that the corporate sector in
industrial countries will not return to the large negative financing positions of the past. Nevertheless,
excess savings are unlikely to be sustained at current
record levels, particularly if the degree of slack in the
advanced economies continues to decline – thereby
encouraging stronger investment spending – or corporate profitability weakens. Therefore, high corporate saving should not be relied on to offset the low
saving of the household and government sectors and
keep long-term interest rates at present levels.
Indeed, without some increase in household and
government saving in the coming years, changing
corporate behaviour will likely start to put upward
pressure on interest rates and could exacerbate the
current pattern of global imbalances by lowering
total private saving in deficit countries.
HCS
• Operating profits are not abnormally high,
although they have been boosted by low interest
rates and a generalised reduction in corporate tax
payments. If companies consider these factors
unlikely to be sustained in the future, they may
hold back on investment and instead raise their
savings.
• Technological change has reduced the relative
price of capital goods, reducing the nominal
spending needed to achieve a given volume of
capital.
• Companies have increased their purchases of
assets abroad, shifting resources from domestic
capital accumulation.
• Companies have increased their desired cash
holdings, partly as a reaction to the more uncertain operating environment, the increasing role
of intangible assets in a knowledge-based economy, and possibly the uncertainties associated
with having to meet currently unfunded pension
liabilities.
1 International Monetary Fund, World Economic Outlook, April
2006, Washington, DC, Ch. IV.
53
CESifo Forum 2/2006