From a Savings Glut to a Savings Shortage

Over the past two decades, the global economy has been characterized by an abundance of savings. This “savings glut” contributed to a persistent decline in long-term interest rates: there was more capital available than there were attractive investment opportunities.

Today, the picture looks very different. Investment needs have expanded significantly, while the pool of available capital is becoming increasingly constrained. Consider, for example, the massive wave of AI-related investment in the United States, or the substantial investments in defense and infrastructure currently taking place across Europe.

Interest rates are, in essence, the price of money. When capital is abundant and attractive investment opportunities are scarce, the price of money tends to fall. This was precisely what we saw in the aftermath of the 2008 financial crisis and the 2020 COVID-19 crisis. In the years following these crises, global economic growth remained subdued. Against that backdrop, it was hardly surprising that large corporations showed limited appetite for new investment. The result was weak demand for investment capital.

Today, we find ourselves in almost the exact opposite situation. There is no shortage of potentially attractive investment opportunities, but the amount of capital available to fund them is becoming increasingly limited.

Belgium provides an interesting example. More money is currently being invested in equities than is being saved. The younger generation, in particular, is increasingly choosing to invest rather than save. And this is by no means a uniquely Belgian phenomenon. Similar trends can be observed across other Western industrialized economies.

There is another important factor to consider: the increasingly stretched fiscal position of Western governments. Budget deficits and debt-to-GDP ratios are rising across much of the world. Governments are therefore competing for hundreds of billions in capital to finance their deficits. This represents an additional source of demand for capital — and, ultimately, upward pressure on interest rates, the price of money.

In short, data centers, new power-generation capacity to supply those data centers, defense and infrastructure investment, and governments seeking to finance persistent budget deficits are all competing for the same pool of global savings.

This points to a fundamentally different environment, illustrated in Chart 1: a shift from a “savings glut” to a “savings shortage.”

In our view, this structural shift also helps explain the persistent upward trend in long-term interest rates.

Chart 1: Savings vs. Investment

Source: Apollo Chief Economist