Consumers may keep on saving

But few researchers have warned that a key indicator of consumer caution, savings, may revert to levels not seen for more than 36 years wreaking even further havoc on businesses dependent on spending.

The theory is that Australians have been rattled by the global financial crisis and continuing volatility, resulting in a sharp rise in consumer savings.

As a consequence, the money being saved is not going to where it would otherwise go for example, to discretionary retailers as individuals reduce their debts and increase their savings.

All this is a hammer blow for businesses exposed to consumers, who suddenly find them in retreat.

In the retail world (although some have faced their own battle with private equity debt) the recent toll has included Colorado, Borders, Angus & Robertson and Clive Peeters.

The commonly held view is that eventually the strong levels of employment and an easing in interest rates will restore consumer confidence, and customers will come rushing back to the stores.

The warning that consumers may be inclined to save even more than they already are has been made by two fund managers at AMP Capital Investors, Simon Warner and Andrew Scott.

Saving levels are at their highest since the mid 1980s, running at levels above 10 per cent of disposable income.

Much has been made of how this represents a sharp hike from our whirlwind romance with debt in the late 2000s, when the household saving rate fell to below 0 per cent.

That is, like the proverbial drunken sailor, we were spending more than we earned through borrowing money.

But what has been less remarked on is that household saving rates nearly touched 20 per cent in the mid-1970s.

"Frequently, the assumption is made that once household wealth (or related measures such as debt to income or debt to assets ratios) has stabilised at pre-GFC levels, the upwards pressure on the savings rate is likely to subside," Warner and Scott write.

But they argue consumers may have realised more fundamentally particularly when they realised that the pre-GFC returns were not widely available that their savings rate is not enough to fund their retirement.

"When the household sector does look forward, the scale of underfunding for retirement goals under a variety of realistic scenarios has the potential to generate continuous upward pressure on the savings rate in Australia," they write.

"Investors should be aware that in our judgment the risks around the savings rate remain to the upside."