ADVANCE FOR SUNDAY, OCT. 6, 2013 FILE – In this Sept. 7, 2013, file photo, women run from the effects of tear gas past a wall that reads in Portuguese “Who pays the price?” during a protest in Rio de Janeiro, Brazil. While Brazil, Russia, India and China recovered quickly from the crisis, they accounted for only 22 percent of consumer spending in the 10 biggest economies in 2012. (AP Photo/Silvia Izquierdo, File)
NEW YORK (AP) — Five years after U.S. 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 Associated Press 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. “The attitude toward risk is permanently reset.”
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.
Weak growth around the world means wages in the United States, which aren’t keeping up with inflation, will continue to rise slowly. Record unemployment in parts of Europe, higher than 35 percent among youth in several countries, won’t fall quickly. Another wave of Chinese, Brazilians and Indians rising into the middle class, as hundreds of millions did during the boom years last decade, is unlikely.
Some of the retrenchment is not surprising: High unemployment in many countries means fewer people with paychecks to spend. Some people who lost jobs got new ones that pay less or are part time. But 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 AP 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 2012. The focus was on the world’s 10 biggest economies — the U.S., China, Japan, Germany, France, the United Kingdom, Brazil, Russia, Italy and India — which have half the world’s population and 65 percent of global gross domestic product.
— RETREAT FROM STOCKS: A desire for safety drove people to dump stocks, even as prices rocketed from crisis lows in early 2009, and put their money into bonds. Investors in the top 10 countries pulled $1.1 trillion from stock mutual funds in the five years after the crisis, or 10 percent of what they had invested at the start of that period, according to Lipper Inc., which tracks funds.
They put even more money into bond mutual funds — $1.3 trillion — even as interest payments on bonds plunged to record lows.
— SHUNNING DEBT: Household debt surged at an unprecedented rate in the five years before the financial crisis. In the U.S., the U.K. and France, it soared more than 50 percent per adult, according to Credit Suisse. For all 10 countries, it jumped 34 percent. Then the financial crisis hit, and people slammed the brakes on borrowing. Debt per adult in the 10 countries fell 1 percent in the 4½ years after 2007. Economists say debt hasn’t 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.
“Given what they’ve lived through, households are loath to borrow again,” says Jack Ablin, chief investment officer of BMO Private Bank in Chicago. “They’re not going to stretch. They want a cushion.”
— HOARDING CASH: Looking for safety for their money, households in the six biggest developed economies added $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, according to the Organization for Economic Cooperation and Development.
The growth of cash is remarkable because millions more were unemployed, wages grew slowly and people diverted billions to pay down their debts. They also poured money into bank accounts knowing they would earn little interest on their deposits, often too little to keep up with inflation.
— SPENDING SLUMP: Cutting debt and saving more may be good in the long term, but to do that, people have had to rein 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.
— DEVELOPING WORLD NOT Login to read more