consumer confidence as a determinant of … aneta.… · · 2014-01-07consumer confidence as a...

Annals of the „Constantin Brâncuşi” University of Târgu Jiu, Economy Series, Issue 6/2013

„ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 2344 – 3685/ISSN-L 1844 - 7007

CONSUMER CONFIDENCE AS A DETERMINANT OF HOUSEHOLD

PROPENSITY TO SAVE

ANETA MARIA KŁOPOCKA

PHD., LECTURER, UNIVERSITY OF FINANCE AND MANAGEMENT IN WARSAW,POLAND

e-mail:[email protected]

Abstract

The following paper elaborates on the significance of saving for the financial stability. The changes in the

propensity to save of households in Poland between 1997-2010 are discussed. A regression analysis was carried out

in order to test the influence of changes in consumer confidence on the household saving rate. It has been

demonstrated that a change in consumer confidence for the positive has a negative impact on the saving rate and a

change for the negative contributes to a greater propensity to save.

Keywords: Households, propensity to save, household saving rate, consumer cofidence, financial stability

JEL Classification: D91, E21

The author gratefully acknowledges the comments and suggestions of the ECOTREND2013 conference participants at the

„Constantin Brâncuşi” University of Târgu Jiu.

1.Introduction

Difficulties of the global economy in the recent years have demonstrated the significance of financial stability

of households for the processes of sustainable growth. In the light of the financial crisis initiated on the American

market and collapse of the dynamics of the development of many domestic economies, household consumption and

saving processes have become a topic for lengthy discussions in the literature.

The major objectives of the following paper are: stressing the significance (necessity) of saving for the

financial stability of households, considering changes in the propensity of Polish households to save, and analysing

the influence of the degree of optimism that consumers feel about the overall state of the economy and their personal

financial situation over their propensity to save.

The following paper presents selected results of a research project entitled: Directions of changes in household saving

behaviour – international perspective. The project was funded by the National Science Centre (Poland); the funds

were granted on the basis of a decision No. DEC-2011/01/B/HS4/05114.

2. Economic security of households

In the years preceding the financial crisis, the indebtedness of households, as measured by the ratio of debt to

personal disposable income (household leverage), has dramatically increased in many developed countries. In 2007,

this ratio reached the highest point in the history of the United States, i.e. 133%. A broad array of co-existing factors,

such as low interest rates, weak lending standards, increase in real estate prices, development of securitization, etc.,

have contributed to the increase in the indebtedness of households. Much of the run-up in debt was mortgage-related.

The substantial increase in indebtedness was accompanied by a constant decrease in the saving rate. Combination of

the increasing indebtedness with the decreasing saving rate facilitated greater dynamics of consumption than

disposable income and had a stimulating effect on economic growth [FRBSF 2009].

Nonetheless, as demonstrated by A. Mian, K. Rao, and A. Sufi [2013], high level of indebtedness of

households combined with a collapse in real estate prices was the main factor causing a grievous decline in

consumption between 2006 and 2009. It has long been pointed out [Rytelewska 2005, pp. 48-49] that excessive

development of credit may lead to an economic collapse, deepen and prolong economic contraction and preserve the

business cycle. Furthermore, the most recent analyses of empirical data [IMF 2012, pp. 89-124; Glick, Lansing, 2010]

suggest that the larger the increase in indebtedness of households followed by the fall in real estate prices, the more

dangerous the consequences in a form of: a decline in consumption of households, increase in unemployment, and

decrease of the real GDP.

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http://en.wikipedia.org/wiki/Economy

http://en.wikipedia.org/wiki/Personal_finance




Appropriate formulation of household balance sheets is important on a macroeconomic scale as well as from

the perspective of individual entities. It protects households against possible insolvency and its adverse socio-

economic consequences. Household savings play a major role in this matter. By means of saving, households

demonstrate their preferences in terms of intertemporal choice and allocate consumption in time, and what is more

they reduce (or increase in the case of negative net savings) exposure to liquidity risk.

Browning, Lusardi [1996, pp. 1797-1855] accentuate the existence of considerable heterogeneity in the

motives for saving. “It is unlikely that a single explanation will suffice for all members of a population at any given

time or even for the same person over a long stretch of time”. Moreover, many of the motives are complementary.

“For example, households that save for retirement (the life-cycle motive) will also built up financial reserves that can

be used to buffer pre-retirement income and consumption shocks.” Thus savings have a clearly positive influence on

the economic security of households.

Lusardi, Schneider, Tufano [2011, pp. 83-134] have demonstrated that households’ own savings are the

resource used most often to deal with shocks (but resources of family and friends, formal and alternative credit,

increased work hours, and sale of possessions are also used frequently, especially among some subgroups). They also

find evidence suggestive of a “pecking order” of coping methods, with savings first in line.

3. Household propensity to save in Poland

Panek, Białowolski, Kotowska, Czapiński, [2013, pp. 59-82] provide empirical evidence on the importance of

the precautionary motive for Polish households – it explains a sizeable part of wealth holdings in Poland and is the

most prevalent objective of saving. The research project Social Diagnosis [Diagnoza Społeczna]1 carried out in the

year 2000 showed that as much as 79 per cent of households accumulating savings declared that they save in order to

build up reserves for unexpected circumstances. In the following years, the percentage of households saving for

precautionary motive decreased to 60 per cent in 2011 but increased up to 67 per cent in 2013 (Figure 1). During the

whole period of analysis, the precautionary motive was given much more often than any other motive. Panek,

Białowolski, Kotowska, Czapiński, [2013, pp. 59-82] estimated that savings for building up reserves for unexpected

circumstances constituted 18 per cent of all savings in 2013.

Figure 1. Household saving motives in Poland (2000-2013)

1 Social Diagnosis is a comprehensive research project taking into account the condition and quality of life in Poland

as reported by the Polish themselves. Measurement of the condition of life involves, among others, studying the

manner of allocating income by households.

This is panel research. All available households studied in the previous test rounds take part in the successive rounds

as well as households from a new representative sample. Seven test rounds have been carried out by now: in 2000,

2003, 2005, 2007, 2009, 2011, and 2013. In 2013, 12355 households with 36293 members were studied and 26307 of

these members of 16 years old or more were tested individually. The total number of households tested in all the

seven rounds amounted to 23804, with 75003 members and 56038 individual respondents. More information about

the research methodology is available at: [Panek, Czapiński, Kotowska, 2013].

0 20 40 60 80

precautionary motive

retirement

current consumption…

vacation

medical treatment

housing repairs

children needs

consumer durables

regular payments

other motives

rehabilitation

not defined purpose

purchase of…

enterprise motive

%

2000

2005

2009

2011

2013

14



Source: Panek, Białowolski, Kotowska, Czapiński, 2013, pp. 59-82.

It must be noted, however, that the share of households with accumulated savings was low for the whole

period but had a clear tendency to increase (in 2000 – 24%, in 2013 – 40%). In 2013, only nineteen per cent of

households accumulated savings exceeding a 6-month income. Kośny, Piotrowska [2013, pp. 1-71] revealed that in

these circumstances, the main factor affecting economic security of households in Poland is the stability of

employment and income.

The increase in the share of households with accumulated savings did not contribute to a rise in the saving

rate. On the contrary, there was a long-term downward trend in the household net saving rate in Poland (and in the

United States likewise) from over 16 per cent in 1995 to a value below zero in 2008 [OECD, 2012]. In the first

decade of this century, when interest rates on global financial markets had been historically low and mortgage loans

had been available in foreign currencies, indebtedness of households for housing purposes soared also in Poland.

High dynamics of the demand for real estate caused an increase in its prices, which, by means of wealth effect and

credit channel (an increase in the value of collateral) – just as in the USA – led to a reduction in the savings rate. The

other factors exerting an adverse influence over the propensity to save were: tax arrangements, decrease in interest

rates, and lenient credit policy of banks as all of them contribute to the increase in indebtedness of households for

consumption purposes and lower the motivation to save. The lessening of financial constrains such as liquidity and

down payment constrains decreased households’ need to save before major purchases. Since the year 2008, real estate

prices on the primary and secondary market in Poland have started to fall (though at a much slower pace than in the

USA) as a result of limitations of the demand and the surplus of unsold properties. As a consequence of the economic

slowdown, households became much more cautious: fear of unemployment became deeper, evaluations of the

prospects for the domestic economy and the state of personal finances became more negative [Kłopocka 2009, pp.

457-461]. These circumstances accompanied a hike in the household saving rate that has occurred (Figure 2).

Figure 2. Household net saving rate in Poland (as a percentage of household disposal income)

Source: OECD, 2012.

4. Methodology and data

In the further part of this paper, regression analysis is presented, which was carried out in order to establish

the relationship between the propensity to save of households and consumer confidence with the use of mathematical

models.

The time horizon in the analysis was determined by availability of data and is the period between 1997 and

2010.

In this paper, the household net saving rate, i.e. the relation between savings and net income of households,

was employed as an index of households’ propensity to save. Data on this matter were obtained from the databases of

OECD.

Two composite indexes of consumer confidence (current and forward consumer confidence indexes) and their

components (estimated by the Central Statistical Office as part of research in cooperation with the National Bank of

Poland) were adopted as independent variables describing consumer confidence. The two composite indexes of

consumer confidence are as follows:

1. Current Consumer Confidence Index (CCCI) indicating the sentiment of consumers based on their opinions

on the financial condition of their own household, domestic economy, and conditions for making important

purchases. The index takes values between -100 and 100, a positive value signifies that the majority of subjects has a

good opinion on their own and the economy’s condition, however, a negative value points to a higher number of

subjects holding an opposing view.

-2

0

2

4

6

8

10

12

14

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

Household net saving rate

15



2. Forward Consumer Confidence Index (FCCI) represents the predictions of consumers concerning changes

in the financial condition of their households and the Polish economy in the next twelve months. The index takes

values between -100 and 100, a positive value signifies that the majority of subjects is optimistic about the changes

that will occur in the next twelve months, however, a negative value points to a higher number of subjects holding a

pessimistic view.

The values of composite indexes are estimated with the use of values of component indexes which are

numerical entries of responses to particular questions. The values of component indexes are estimated by multiplying

the percentage of responses to a given option in a question by its weight and adding up the products. The questions

taken into consideration at estimation of the indexes: CCCI and FCCI along with the weights of the options are

provided in table 1.

Table 1. Questions from a questionnaire concerning consumer confidence in Poland used for the purpose of

estimation of the CCC and FCC indexes Symbol of the

component

indexes

Question Response option Weight

I1 How has the financial condition of your

household changed in the last 12 months?

It is much better 1.0

It is slightly better 0.5

It has remained the same 0.0

It is slightly worse -0.5

It is much worse -1.0

I do not know 0.0

I2 How do you expect the financial condition

of your household will change in the next 12

months?

It will be much better 1.0

It will be slightly better 0.5

It will remain the same 0.0

It will be slightly worse -0.5

It will be much worse -1.0

I do not know 0.0

I3 How do you evaluate the changes in the

general condition of the economy in the last

12 months?

It is much better 1.0

It is slightly better 0.5

It has remained the same 0.0

It is slightly worse -0.5

It is much worse -1.0

I do not know 0.0

I4 How do you expect the general condition of

your country’s economy will change in the

next 12 months?

It will be much better 1.0

It will be slightly better 0.5


It will be slightly worse -0.5

It will be much worse -1.0

I do not know 0.0

I7 How do you expect the level of

unemployment in your country will change

in the next 12 months?

It will increase considerably 1.0

It will slightly increase 0.5


It will slightly decrease -0.5

It will decrease considerably -1.0

I do not know 0.0

I8 Taking into account the general condition of

the country’s economy, do you think now is

the right time for people to make important

purchases?

Yes, now is the right time 1.0

It is neither the right nor a bad

time

0.5

No, it is not the right time -1.0

I do not know 0.0

I11 How likely do you think it is that in the next

12 months you will save any sum of money?

Very likely 1.0

Quite likely 0.5

Unlikely -0.5

Absolutely unlikely -1.0

I do not know 0.0

Source: GUS 2004, pp. 21-24.

The mathematical equation of the CCCI is as follows:

16



∑

(1),

where I1, I2, I3, I4, I8 are empirical values of component indexes from table 1.

The mathematical equation of the FCCI is as follows:

∑

(2),

where I2, I4, I7, I11 are empirical values of component indexes from table 1.

The values of customer confidence composite indexes (CCCI, FCCI) and of component indexes (I1, I2, I3, I4,

I7, I8, I11) are presented in table 2.

Table 2. The customer confidence composite and component indexes in Poland (1997-2010)

Year I1 I2 I3 I4 I7 I8 I11 CCCI FCCI

1997 -21,6 -11 -12,8 -10 -15 -13,4 -51,4 -13,8 -21,9

1998 -28,6 -19,2 -22,3 -17 -27,3 -16,6 -55 -20,8 -29,6

1999 -36,3 -25,3 -37,9 -29,7 -53,1 -21 -57,6 -30 -41,4

2000 -40,6 -26,8 -45,8 -29,5 -62 -25,8 -60,1 -33,7 -44,6

2001 -39,7 -25,8 -51,8 -32,2 -68 -27,8 -60,1 -35,5 -46,5

2002 -39,6 -27,8 -52,9 -35,1 -63,8 -32,1 -64,6 -37,5 -47,8

2003 -38,1 -24,5 -51,7 -35,2 -54,1 -29,4 -65,4 -35,8 -44,8

2004 -33,1 -22,3 -49,5 -30,8 -30,3 -23,3 -58,8 -31,8 -35,7

2005 -27 -12 -38,5 -16,7 -24,8 -16,4 -54,6 -22,1 -27,2

2006 -18,2 -6,1 -26,2 -13 -6,3 -11,1 -48,3 -14,9 -18,5

2007 -10,9 -1,9 -17,7 -6,6 17,6 1,3 -40,7 -7,1 -7,9

2008 -10,6 -4,5 -16,6 -9,7 5,1 1,2 -37,2 -8 -11,6

2009 -18,1 -11,1 -40 -26,5 -54,6 -16,1 -37,1 -22,3 -32,5

2010 -17,2 -8,2 -31,2 -18,9 -34,4 -9,2 -32 -16,9 -23,5

Source: http://www.stat.gov.pl/cps/rde/xbcr/gus/KON_koniunktura_konsum_11m_2013.pdf

Figure 3 shows the changes in household saving rate versus customer confidence indexes in Poland in the

period between 1997 and 2010.

Figure 3. Household saving rate versus customer confidence indexes in Poland (1997-2013)

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Household net saving rate I1 I2

I3 I4 I7

I8 I11 CCCI

FCCI

17



Source: OECD, 2012; http://www.stat.gov.pl/cps/rde/xbcr/gus/KON_koniunktura_konsum_11m_2013.pdf

5. Results

The results of simple linear regression analysis for all the composite and component indexes are provided in

tables 3-5. Generally, there is a statistically significant relation between the household saving rate and the indexes of

consumer confidence. However, in the case of indexes: I3, I4 and CCCI, the influence of changes in these

independent variables on saving rate cannot be confirmed on the basis of the performed analysis. The highest

influence on household saving rate is exerted by indexes I1 and I2 which are directly related to the financial situation

of a household. According to the simple linear regression with I1 as the independent variable, 39 per cent of variation

in the household saving rate is accounted for the evaluation of the current financial condition of a household (I1).

According to the simple linear regression with I2 as the independent variable, fluctuations in evaluation of the future

condition of a household (I2) explained 37 per cent of variation in the household saving rate. Thirty-six per cent of

the variation in the dependent variable was explained by a model where the independent variable was the evaluation

of the buying climate (I8). Variation in the household saving rate were to a slightly smaller extent (34% and 33%)

explained by equations with FCCI and I7 as independent variables, respectively. The results imply that households

save less, if they expect their financial situation to improve, and that higher income risk is positively associated with

saving. This stands in agreement with findings of other authors who studied the influence of the degree of optimism

that consumers feel about their household financial situation and the overall business climate on consumption, saving

or debt accumulation.

Table 3. Regression Statistics I1 I2 I3 I4 I8 CCCI I7 I11 FCCI

Multiple R 0,625689 0,6117375 0,2328712 0,3775651 0,6025621 0,495875 0,577228 0,546377 0,587289

R-squared 0,3914869 0,3742228 0,054229 0,1425554 0,3630811 0,245892 0,333192 0,298528 0,344908

Adj R-

squared

0,3407774 0,3220747 -0,0245852 0,0711017 0,3100045 0,183049 0,277624 0,240072 0,290317

Std. Err. 2,7858675 2,8251099 3,4731095 3,3069567 2,8501489 3,10129 2,916258 2,991099 2,890524

Number of

obs

14 14 14 14 14 14 14 14 14

Source: own calculations.

Table 4. ANOVA

df SS MS F SIGNIFICANCE

I1 Regression 1 59,91691 59,91691 7,720199 0,016696

Residual 12 93,13269 7,761058

Total 13 153,0496

I2 Regression 1 57,27465 57,27465 7,176153 0,02008

Residual 12 95,77495 7,981246

Total 13 153,0496

I3 Regression 1 8,299727 8,299727 0,688061 0,423019

Residual 12 144,7499 12,06249

Total 13 153,0496

I4 Regression 1 21,81805 21,81805 1,995073 0,183217

Residual 12 131,2316 10,93596

Total 13 153,0496

I8 Regression 1 55,56942 55,56942 6,840703 0,022573

Residual 12 97,48018 8,123349

Total 13 153,0496

CCCI Regression 1 37,63363 37,63363 3,912834 0,071342

Residual 12 115,416 9,617998

Total 13 153,0496

I7 Regression 1 50,99487 50,99487 5,996179 0,030666

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http://en.wikipedia.org/wiki/Consumer




Residual 12 102,0547 8,504561

Total 13 153,0496

I11 Regression 1 45,68954 45,68954 5,106876 0,043223

Residual 12 107,3601 8,946671

Total 13 153,0496

FCCI Regression 1 52,78809 52,78809 6,318048 0,027229

Residual 12 100,2615 8,355126

Total 13 153,0496


Table 5. Coefficients Coefficients Standard Error t Stat P-value

I1 Intercept 2,363472 2,049838 1,153004 0,271359

I1 -0,19571 0,070437 -2,77852 0,016696

I2 Intercept 4,003332 1,563195 2,560993 0,024956

I2 -0,22664 0,084603 -2,67883 0,02008

I3 Intercept 5,686513 2,565042 2,216928 0,046696

I3 -0,05611 0,067644 -0,82949 0,423019

I4 Intercept 4,834929 2,193144 2,204565 0,047744

I4 -0,12766 0,090384 -1,41247 0,183217

I8 Intercept 4,267888 1,50739 2,83131 0,015139

I8 -0,1987 0,075973 -2,61547 0,022573

CCCI Intercept 3,854283 2,099526 1,835787 0,091279

CCCI -0,16178 0,081786 -1,97809 0,071342

I7 Intercept 5,202852 1,273807 4,084488 0,001514

I7 -0,07333 0,029948 -2,44871 0,030666

I11 Intercept -1,21298 4,011263 -0,30239 0,76753

I11 -0,17203 0,076126 -2,25984 0,043223

FCCI Intercept 2,929329 2,038112 1,437276 0,176199

FCCI -0,1531 0,06091 -2,51357 0,027229


6. Conclusions

The financial crisis in the last few years has emphasised that households’ consumption and saving decisions

should play a central role in financial stability analyses. Appropriate formulation of households’ balance sheets

improves financial security and helps to overcome income and demand shocks. The literature on the subject often

presents psychological circumstances surrounding the processes of saving. Thus, the following paper elaborates on

the changes in the propensity to save of households in Poland between 1995-2010. A regression analysis was carried

out in order to test the influence of changes in consumer confidence on the household saving rate. It has been

demonstrated that a change in consumer confidence for the positive has a negative impact on the saving rate, and a

change for the negative contributes to a greater propensity to save, especially out of a precautionary motive. Further

empirical research is desirable, in particular at the microeconomic level into how households’ expectations influence

their consumption and saving decisions.

7.Bibliography

[1] Browning M., Lusardi A., Household Saving: Micro Theories and Micro Facts, Journal of Economic Literature,

Vol. 34, No. 4, Dec., 1996.

[2] FRBSF, U.S. Household Deleveraging and Future Consumption Growth, FRBSF Economic Letter, No. 16, 2009.

19



[3] Glick R., Lansing K. J., Global Household Leverage, House Prices, and Consumption, FRBSF Economic Letter,

No. 1, 2010.

[4] GUS, Badania koniunktury. Koniunktura konsumencka. Tendencje zmian październik 2003-styczeń 2004

[Business outlook studies. Consumer confidence. Trends, October 2003-January 2004], Warsaw 2004.

[5] IMF, Growth resuming, dangers remain, World Economic Outlook, April 2012.

[6] Kłopocka A., Wpływ kryzysu na zmiany w procesach oszczędzania gospodarstw domowych, Uniwersytet

Szczeciński, „Zeszyty naukowe” nr 548, [The influence of crisis on the household saving behavior, Research

Magazines of Szczecin University No. 548], 2009.

[7] Kośny M., Piotrowska M., Economic security of households and their savings and credit, NBP Working Paper

No. 146, Warsaw 2013.

[8] Lusardi A., Schneider D., Tufano P., Financially Fragile Households: Evidence and Implications, ”Brookings

Papers on Economic Activity”, Spring 2011,

http://www.brookings.edu/~/media/projects/bpea/spring%202011/2011a_bpea_lusardi

[9] Mian, A. R. and Rao, K. and Sufi, A., Household Balance Sheets, Consumption, and the Economic Slump,

Chicago Booth Research Paper No. 13-42; Fama-Miller Working Paper (June 7, 2013). Available at SSRN:

http://ssrn.com/abstract=1961211 or http://dx.doi.org/10.2139/ssrn.1961211

[10] OECD (2012), http://stats.oecd.org/

[11] Panek, T., Białowolski, P., Kotowska, I.E., Czapiński, J., Warunki życia gospodarstw domowych. Zasobność

materialna. Diagnoza Społeczna 2013 Warunki i Jakość Życia Polaków - Raport. [Households condition of life.

Material status. Social Diagnosis 2013, Condition and Quality of Life in Poland – Report.] [Special issue].

Contemporary Economics, 7, 2013. DOI: 10.5709/ce.1897-9254.99

[12] Panek, T., Czapiński, J., Kotowska, I. E., Metoda badania. Diagnoza Społeczna 2013 Warunki i Jakość Życia

Polaków – Raport. [Research methodology. Social Diagnosis 2013, Condition and Quality of Life in Poland –

Report.] [Special issue]. Contemporary Economics, 7, 2013. DOI: 10.5709/ce.1897-9254.96

[13] Rytelewska G., Bankowość detaliczna – procesy oszczędzania i kredytowania gospodarstw domowych w: G.

Rytelewska (red.), Bankowość detaliczna [Retail banking – saving behaviour and crediting of households in: G

Rytelewska (ed.), Retail banking], PWE, Warsaw 2005.

[14] www.stat.gov.pl, http://www.stat.gov.pl/cps/rde/xbcr/gus/KON_koniunktura_konsum_11m_2013.pdf

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