IMF predicts excessive corporate savings to continue

The excess savings built up by corporations in developed countries, currently at record levels, are likely to remain high, according to the International Monetary Fund (see graph).

If the IMF is right, it has important consequences for investors as the accumulation of corporate savings is a key factor behind low interest rates.

The World Economic Outlook rejects the explanation that the corporate savings glut is largely a response to the bursting of the stockmarket bubble. Other factors, both cyclical and long term, also played a key role.

One of the main reasons for the savings build-up is an increase in corporate profitability. This trend is particularly marked in Germany and Japan, although profits have declined sharply in Italy. However, the IMF argues that the increase in profits is largely the result of lower tax and interest payments rather than abnormally high operating profits. In some countries, profits received from foreign operations also played a port.

An important secular factor in corporate saving is a decline in the relative price of capital goods as a result of technological change. Firms now have to invest less in nominal terms to achieve a given real investment rate, the report says.

Companies also seem to want to hold more cash. The IMF attributes this to an uncertain operating environment for corporations and the increasing role of intangible assets. Uncertainties around unfounded pensions liabilities may also play a part.

The IMF estimates that during 2003-4, corporates in the G7 countries accumulated $1.3trn (730bm) of assets more than twice the level of current account surpluses of developing and emerging countries over the same period. This savings glut could be an important contributor to the current low global level of long-term interest rates.