The September edition of the Reserve Bank of Australia’s “Reserve Bank Bulletin” has an excellent article titled “Patterns and Trends in Global Saving and Investment Ratios”. The article compares saving and investment ratios of different countries and regions and their impact on the current deficits.

In this post, let me present some of the key points from the article. Saving and investment ratios tend to vary across regions and countries. Traditionally Asian countries have had high saving ratios. In recent times, the investment ratios of Asian countries is also tending higher as shown in the graph below.

China and India are among the top savers in the world. India’s saving accounts for over 35% of GDP. For China, it is close to 60%. Developed countries have low saving ratios. The United States has the lowest saving ratio in the developed world. In addition to high Saving ratio, the Chinese have high investment ratio as well.

In Asia, saving ratios traditionally exceeded investment ratios producing a large current account surplus. China has run a current account surplus since 2000. Oil exporting countries in the Middle East and Russia also have current account surplus. These countries supply their global saving to developed countries. The advanced economies historically have run current account deficits. Since the early 90s, the current account deficit has increased sharply in US.

On the development in saving and investment ratios in the U.S., the article noted:

“As noted, the current account deficit in the United States widened sharply between the late 1990s and mid 2000s as the saving ratio fell – with a large decline in public saving in particular – while its investment ratio was boosted by a rise in housing construction. But since the mid 2000s, the US investment and saving ratios have changed by a broadly similar magnitude, and hence the US current account has been comparatively steady.” This analysis is absolutely correct since residential construction was one of the major drivers of the US economy until a few years ago. Large and small banks handed out loans liberally for investment purposes in the real estate sector. While that strategy boosted profits in the short run and increased the investment ratio for a few years, the negative effects of that reckless lending is being felt on a daily basis in the US. For example, the total number of failed banks has risen to 94 as of last Friday.

The effect of rise in construction spending leading to high investment ratio is evident in Spain as well as the chart below shows. The chart also shows that since the 1990s Germany has had a high saving ratio but low investment ratio.

The article concludes that declining domestic demand and tight financial conditions will lead to a sharp fall in investment in the U.S. Globally the economic downturn is projected to lead to a decline in saving and investment ratios in major countries and regions.

Recently Madrid-based influential real estate market analysts R.R. de Acuña & Asociados released the annual report on the property market in Spain. Releasing the report, Fernando Rodríguez y Rodríguez de Acuña, president of the company said “There are no green shoots around here” describing the state of the Spanish property market.

This is not surprising since Spain’s property markets has been booming to incredible levels until the credit crisis started. The construction sector offered jobs to millions of locals and migrants alike. However in recent months that has changed dramatically. The unemployment rate in second quarter reached to 17.9% more than twice the European average.

Demand for housing is expected to be about 220,000 homes per year while there were 1.6 million unsold houses at the end of 2008. At these levels it will take 6 to 7 years for the market to recover.

Fernando Rodríguez pointed out that “The market situation doesn’t justify more building, and anyway the banks won’t lend money to build something that won’t sell” and and predicts that 75% of all Spanish property developers will be wiped out in the next 5 years due to excessive debt, the current property market slump and “bad management”.

Mr.Fernando Rodríguez makes an astute observation on the Spanish market. This scenario holds true for the U.S. market as well. There is no reason for developers to continue adding to the existing inventory. However some builders are already starting to initiate new development plans here.

Due to their significant overseas presence, the two largest banks of Spain, Banco Santander(STD) and BBVA(BBV) are not impacted heavily by the domestic housing market collapse. In addition to Europe, Latin American these two banks are also concentrating on expansion in the U.S. Santander bought Sovereign Bank and more recently BBVA acquired the failed bank, Guaranty Financial of Texas.