Five years after US investment bank Lehman Brothers collapsed, triggering a global financial crisis and shattering confidence worldwide, families in major countries around the world are still hunkered down, too spooked and distrustful to take chances with their money.
An analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation.
“It doesn’t take very much to destroy confidence, but it takes an awful lot to build it back,” says Ian Bright, senior economist at ING, a global bank based in Amsterdam.
A flight to safety on such a global scale is unprecedented since the end of World War II.
The implications are huge: Shunning debt and spending less can be good for one family’s finances. When hundreds of millions do it together, it can starve the global economy.
Some of the retrenchment is not surprising: High unemployment in many countries means fewer people with paychecks to spend. However, even people with good jobs and little fear of losing them remain cautious.
“Lehman changed everything,” says Arne Holzhausen, a senior economist at global insurer Allianz, based in Munich. “It’s safety, safety, safety.”
The Associated Press analyzed data showing what consumers did with their money in the five years before the Great Recession began in December 2007 and in the five years that followed, through the end of last year.
The focus was on the world’s 10 biggest economies — the US, China, Japan, Germany, France, the UK, Brazil, Russia, Italy and India — which have half the world’s population and 65 percent of global GDP.
The key findings are as follows:
RETREAT FROM STOCKS
A desire for safety drove people to dump stocks, even as prices rocketed from crisis lows in early 2009. Investors in the top 10 countries pulled US$1.1 trillion from stock mutual funds in the five years after the crisis, or 10 percent of their holdings at the start of that period, according to Lipper Inc, which tracks funds.
They put more even money into bond mutual funds — US$1.3 trillion — even as interest payments on bonds plunged to record lows.
In the five years before the crisis, household debt in the 10 countries jumped 34 percent, according to Credit Suisse.
Then the financial crisis hit, and people slammed the brakes on borrowing. Debt per adult in the 10 countries fell 1 percent in the 4 years after 2007.
Economists say debt has not fallen in sync like that since the end of World War II.
People chose to shed debt even as lenders slashed rates on loans to record lows. In normal times, that would have triggered an avalanche of borrowing.
Looking for safety for their money, households in the six biggest developed economies added US$3.3 trillion, or 15 percent, to their cash holdings in the five years after the crisis, slightly more than they did in the five years before, the Organisation for Economic Co-operation and Development said.
The growth of cash is remarkable because millions more were unemployed, wages grew slowly and people diverted billions to pay down their debts.
To cut debt and save more, people have reined in their spending. Adjusting for inflation, global consumer spending rose 1.6 percent a year during the five years after the crisis, according to PricewaterhouseCoopers, an accounting and consulting firm.
That was about half the growth rate before the crisis and only slightly more than the annual growth in population during those years.
Consumer spending is critically important because it accounts for more than 60 percent of GDP.