Chapter 3: corporate saving and investment: recent trends and prospects

OECD Economic Outlook, Dec, 2007

Introduction and summary of the main results

Since 2001, OECD corporate net lending has risen sharply

For the aggregate OECD corporate sector, the excess of gross saving over fixed investment (i.e. net lending) has been unusually large since 2002, even allowing for the recent fall (Figure 3.1). Indeed, while attention has increasingly focussed on the emergence of global financial imbalances and a possible global "saving glut", (1) aggregate OECD corporate net lending rose slightly more over 2001-05 than the aggregate external surplus of the emerging market economies (2% of OECD GDP against 1 1/2 per cent of OECD GDP) (Figure 3.2). (2) To the extent the household sector does not fully "pierce the corporate veil", the rise in corporate saving that has driven the run-up in net lending will have contributed to low global interest rates. (3)

[FIGURE 3.1 OMITTED]

[FIGURE 3.2 OMITTED]

A rough and ready decomposition suggests ...

Against this background this chapter examines various facets of corporate net lending with a view to understanding some of the main forces at play behind the recent run-up and providing some insight into whether and how they might possibly unwind in the future, a process that may already be underway. To this end, it attempts to identify cyclical, other transitory and trend influences on corporate net lending, distinguishing, in successive sections, between those phenomena which appear common across most OECD countries, and those which appear more countryspecific. An attempt is made to keep a crude running score-card of these transitory and more long lasting contributions (Table 3.1). The focus of the chapter is on the seven major economies, which have made a large contribution to the increase in total OECD corporate net lending, but other country experiences are also mentioned. China, where corporate net lending has also increased sharply over the recent past is covered separately in Box 3.1. The main findings of the chapter are:

Box 3.1. Corporate saving and investment in China

Since the early 2000s, profits of the corporate sector in China
have risen markedly. Survey data show that companies in the
industrial, retail, wholesale and construction sectors have seen
their after-tax profits rise by about 6% of GDP between 2003 and
2006 (see Table). (1) Profits have also been increasing rapidly in
the banking and telecommunication sectors. Most of the gains in
corporate profits have translated into an increase in retained
earnings (gross saving), as dividend payout ratios are extremely
low for the corporate sector as a whole. (2)

Selected indicators of saving and investment in the Chinese economy

                                                      Change from
                          2003   2004   2005   2006   2003 to 2006

Corporate profits          6.8    8.5    9.4   12.6       5.8
  (selected sectors)
General government net    -0.9      0    0.2    1.1         2
  lending
Gross fixed capital       39.2   40.6   41.5   42.7       3.5
  formation
Current account surplus    2.8    3.6    7.2    9.5       6.7

Source: National Bureau of Statistics, State Administration of
Foreign Exchange, CIEC, OECD calculations.

Outside the corporate sector, net lending by the general government
sector rose by 2% of GDP between 2003 and 2006, with estimates
suggesting that gross government saving increased only modestly
more. (3) Household saving rates are high, at 32% of disposable
income (according to survey data) and a bit less than 17% of GDP,
and appear to have increased only modestly between 2003 and 2006.
National accounts data suggest that investment increased by 3 1/2
per cent of GDP between 2003 and 2006. (4) With saving rising more
than investment, the current account balance rose from 2 3/4 per
cent of GDP in 2003 to an estimated level of 9 1/2 per cent of GDP
in 2006. There are indications that in 2007 corporate profits have
continued to soar and to drive national saving and the current
account surplus.

(1.) The currently published official sectoral accounts stop in
2003 and do not appear to take into account the large revision made
to GDP as the result of the Economic Census. An attempt at updating
the sectoral income and expenditure balances was made by Barnett
and Brooks (2006).

(2.) Just over half of listed companies pay no dividends and
dividends paid by state-controlled listed companies accrue to
holding companies which, in turn, pay no dividend to their ultimate
shareholder, national or local governments.

(3.) The government revenue and spending statements do not present
figures for government fixed capital investment or capital
transfers and so do not permit the calculation of saving. As a
benchmark calculation, total government spending rose by 0.9% of
GDP between 2003 and 2006 and if the share of investment and
capital transfers remained stable at around one third of total
spending, public investment would have increased by about 0.3% of
GDP.

(4.) Estimated as a residual, saving by households seems to have
increased at most by 2% of GDP between 2003 and 2006 (where the
residual = gross investment   current account - gross saving of the
corporate sector - gross saving of the government sector). This
residual includes, however, not only household saving but also
unmeasured corporate profits, mis- measurement of investment and
differences between the income and expenditure measures of GDP.