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Saving and financing behaviour in France

  • Laurent Quignon Head of Banking Economics at BNP Paribas
  • Paris, France
  • 29.05.2019

How do French households save and invest? Can any significant differences be seen in terms of behaviour depending on the regions or socio-professional sectors? How do banks help consumers and businesses with their investment projects? Laurent Quignon, Head of the Banking Economics team at BNP Paribas, shares his analysis.

How do French households save and invest?   

Household savings represent the unused - therefore saved - fraction of their income. So, this flow is usually split into two components, with real savings and financial savings (or “financing capacity”). In relation to gross disposable income (GDI), the first component provides the real savings rate (9.5% in 2018), while the second gives the financial savings rate (4.5%). The sum of the real and financial savings rates gives the overall savings rate (14%). 

Real savings essentially boil down to investment in new homes. Since the early 1990s, they have ranged from 9% to 9.5% of household GDI, except for the 2003-2008 period, when they were slightly higher (close to 11% in 2008). Financial savings are expressed in net terms: they represent the sum of investment flows less credit flows. As a result, identical increases (decreases) in gross investment flows and credit flows do not affect the financial savings rate. An increase (decrease) in the overall savings rate may be linked to either a decrease (increase) in credit flows or an increase (decrease) in investment flows. In this way, an increase in consumer credit flows (which does not in principle lead to a resulting increase in investment flows) weighs on the savings rate.

Are French households really setting new records for savings?

France (14% in 2018), behind Germany (17.9%) and the Netherlands (15.1%), is the major eurozone country with the highest household savings rate (average of 12% across the eurozone). Since 2012, new trends have been taking shape. The household savings rate is contracting slightly in France and, starting from a far lower level, in Spain (4.8%), compared with continued growth in Germany. Outside of the eurozone, the savings rate is trending down in the UK (4.2%).

The stock of financial assets held by households is equal to their gross flows (i.e. before deducting credit flows) of aggregate financial savings to date, in addition to the valuation effects (capital gains or losses). The ratio of households’ total gross financial assets to their GDI in France (366% at end-2018) is slightly higher than for Italy (353%) and the eurozone (336%). It is higher than in Spain (297%) or even Germany, where growth in the overall savings rate is linked to an increase in real savings since 2016, which has not been accompanied by an increase in household debt ratios. However, the ratio of households’ total gross financial assets to their GDI is lower than in Belgium (526%) and especially the Netherlands (659%), where households, in proportion to their GDI, have significantly higher levels of debt than in France (particularly in the Netherlands).  

Photo : Laurent Quignon

Can any significant differences be seen in terms of behaviour depending on the regions or socio-professional sectors?

The savings rate increases with higher levels of qualifications and income. In accordance with the lifecycle economic theory, middle-aged households (30 to 59 year olds) save more than younger and older generations. Empirical analysis suggests that the place of residence has less of an impact, once the characteristics mentioned previously have been controlled. This means that for a comparable level of income, the place of residence has a negligible impact on the savings rate, but this does not mean that the savings rate does not vary between regions, notably depending on household income. 

In accordance with the lifecycle economic theory, middle-aged households save more than younger and older generations.

Although the French National Institute for Statistics and Economic Research (INSEE) does not publish detailed regional accounts, there is no doubt whatsoever that the average savings rate is higher in the Paris Region, Auvergne-Rhône-Alpes and Provence-Alpes-Côte d’Azur than in Occitanie, Hauts de France or Corsica. However, the differences in terms of savings rates between the Paris Region and other regions are probably not as marked as might be suggested by the differences in income levels, because the Paris Region also has a higher proportion of both younger households than average for France and renters, with these features tending to have a negative impact on the savings rate.

What savings products do French people prefer? Are they avoiding certain products?

The main financial investments for households represented a total of just over 5,000 billion euros at the end of 2018, with 65% held as fixed-income products. Over the full year, the percentage of fixed-income products within gross investment flows was even higher (87.4 billion euros out of 113.7 billion euros, representing 77%), which reflects both the current appetite for risk-free products among savers and their lack of interest in equities.  Demand deposits and cash have siphoned off more than half of the flows to fixed-income products. These have also benefited from the very strong upturn in euro life insurance policies, whose net inflows have tripled since 2017. However, net acquisitions of equity products contracted for the second consecutive year (17 billion euros, versus 30.5 billion euros in 2017). The moderate return by households to directly-held listed equities may well have offset the drop in flows to unit-linked life insurance, but at the same time equity-based undertakings for collective investment (UCI) have seen major outflows (-18.1 billion euros). Flows to unit-linked life insurance (15% of gross investment flows) have accounted for the bulk of all net flows to equity products, while sales of equities held as UCIs (-20.8%) have been offset by the strong interest in unlisted equities and other investments (+20.1%), which notably reflects the current success of private equity.

Compared with the same period in 2018, the changes seen between January and March 2019 reflect a significant increase in flows benefiting demand deposits, regulated savings (Livret A, Livret Bleu, LDD, LEP, PEL, PEP, CEL, Livrets Jeunes) and life insurance in euro funds, contrasting with a contraction in flows to unit-linked life insurance. During the first quarter of 2019, Livret A and Livret de Développement Durable et Solidaire savings products collected 9.7 billion euros. These products may well offer a negative real return (their interest rate is 0.75%, compared with annual inflation of 1.3% in April), but the yield curve is virtually flat and risk premiums are relatively low. They only become significant for investments that most households consider to be too risky and are not enough to divert savers from risk-free, tax-exempt, liquid products.

Crédit photo :  ©Tiberius Gracchus

What about businesses, are they good savers? 

Businesses save of course, but their financial savings have traditionally been negative, which means that, unlike households, they need financing. With just a few accounting differences (notably depreciation charges and provisions), the concept of gross savings for non-financial companies under France’s national accounting system corresponds to retained earnings under the private accounting system. The savings rate is calculated as the ratio of gross savings to value-added. 

Today, French businesses show their highest savings rate since 1999

Today, French businesses show their highest savings rate since 1999 (22.3% in the fourth quarter of 2018). From a macroeconomic perspective, since 2013, these gross savings have covered 90% to 100% of investments by businesses, which have historically been high, while at the same time reducing their financing needs.  

What is financed with their investments?

In 2019, the destination for investments is expected to remain similar to 2018. More specifically, the percentage of investments allocated for renewing equipment is expected to be stable, slightly higher than its long-term average. Modernisation and rationalisation investments look set to see their percentage drop slightly below its average. The percentage of investments to increase production capacity is expected to be stable, in line with its average level.

The fact that businesses are covering their real investments with their reserves does not mean that they are not making use of debt. Major businesses are benefiting from exceptionally favourable financing conditions on the bond market to build up liquid assets that will be used subsequently to cover investments. The increase in debt also aims to finance acquisitions abroad. 

How do banks help consumers and businesses with their investment projects?  

One of the essential functions performed by banks is to resolve the mismatch between the preferences of savers (short term, liquid, low risk) and the needs of businesses (long term, riskier financing). In France, 2,300 billion euros to 2,500 billion euros of liquid and short-term savings are transformed into long-term financing within banks’ balance sheets (home loans, investment credits, bonds). 

This role is unfortunately not likely to be performed by the financial markets, on which the success of an issue requires a sufficiently broad base of investors to exist beforehand with preferences that are specifically aligned with the features of the instrument being issued. However, banks perform virtually zero transformation to equity capital. First of all, the absorption of initial losses by the business’ shareholders makes it possible to align, to a certain extent, their interests with those of creditors and limits the moral hazard. Secondly, prudential requirements make it extremely costly for banks in terms of their banking capital to hold corporate equities. However, banks collect long-term savings, which they manage within dedicated funds (equity UCIs, unit-linked funds for life insurance policies and private equity funds) and perform an essential role in the intermediation of savings to business equity capital. 

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