Concerned consumers are saving their cash, not spending

TARA O’NEILL stands empty-handed and defiant outside a Marks & Spencer store on Dublin’s busiest shopping street. She won’t be tempted to buy anything.

“I’ve gotten rid of my credit cards and paid down my overdraft,” said O’Neill, 36, whose construction worker husband is in London after the property bubble collapsed. “Now we’re in recession. I don’t buy what I don’t have to.”

Irish retail sales are falling at more than twice the pace of the average in the euro region after the Government increased taxes and reduced salaries for state workers by 14% to help cope with Europe’s worst banking crisis. Consumer spending plunged 1.9% in the first quarter from the fourth quarter, the steepest drop in two years, according to figures published last month by the statistics office.

With household expenditure accounting for 53% of the economy, Ireland’s ability to emerge from its deepest economic contraction in history may depend on persuading people like O’Neill to start spending the cash they have left. The yield on 10-year Irish bonds rose yesterday to a record amid increasing speculation that the nation’s credit rating may join Greece and Portugal in being downgraded to junk.

Finance Minister Michael Noonan lowered the sales tax on everything from haircuts to meals to 9% from 13.5% starting July 1 and also has pleaded with consumers to replace their “clapped out” refrigerators and tumble dryers.

“There’s a whole generation of Irish people who were born to shop and they’ve had to change their behaviour entirely,” said Austin Hughes, chief economist at KBC Ireland in Dublin, which publishes a monthly index of consumer sentiment. “It’s like they are burrowing deeper into their foxholes, saving and paying off debt, and only coming out for guerrilla raids when they see a big bargain.”

Ireland’s economy has shrunk about 15% since 2007 and the unemployment rate tripled to 14.2% as key exporters, including Dell, and C&C fired workers.

Irish 10-year bond yields climbed 89 basis points, or 0.89 percentage point, to 12.43% yesterday after falling since June 27, while the yield on two-year notes jumped above 15% for the first time after Portugal lost its investment- grade rating at Moody’s Investors Service. Representatives from the European Central Bank, International Monetary Fund and European Commission are in Dublin for the quarterly review of Ireland’s €85 billion bailout agreement reached in November.

Consumers are now saving and repaying debt amid concerns about future increases in interest payments on mortgages that may be bigger than the value of their homes. Ireland’s savings rate rose to 13% last year from 3.6% in 2007, according to Goodbody Stockbrokers in Dublin.

Consumer spending is down 12% since peaking in the fourth quarter of 2007, based on figures from the national statistics office. In the euro region, consumer spending has returned to levels last seen before Lehman Brothers went bankrupt in 2008, said Hughes at KBC.

Speaking to reporters last month in Dublin, Noonan said it’s safe for people to spend again.

“He is talking through his hat,” Andrea Lambert, 28, a dental technician, said outside the St. Stephen’s Green shopping centre in Dublin. “People don’t have more money to spend. Our wages are being hit, prices are going up, and people don’t have the disposable income.”

Tax increases and welfare cuts are costing households about €1,200 a year on average, Hughes said. That may rise as the Government has pledged to reduce the deficit by about €4 billion in 2012, in part by introducing levies on real estate and water use.

Borrowing costs also may climb, with analysts surveyed by Bloomberg predicting the European Central Bank will raise its key rate to 1.75% by the end of 2011 from 1.25%.

“People were taking out 100% mortgages, and just paying back the interest,” Margaret O’Leary, 66, who owns a company with her husband hiring out cranes that was hurt by the economic collapse, said outside the Marks & Spencer on Grafton Street. “They forgot all the zeros at the end.”

At Brown Thomas, sales are up this year, though still down about 15% from the peak of 2007.

Stephen Sealey, managing director of Brown Thomas, said. “The unknown two years ago was much more ‘am I still going to have a job’. The unknown now is ‘why does what is happening to Greece affect us?’”

At the CHQ mall, located in the heart of the IFSC it’s hard to see any signs of recovery.

The 19th century warehouse, built as a tobacco and wine store, was converted into a mall in 2007. Thirteen of the 21 units are empty, with a tea shop, a children’s clothing shop and a shoe store among those that have exited. Louis Copeland is one of eight retailers left.

“We are probably selling about half of what we were selling in 2007,” said Copeland, whose best-selling brand is Canali-designed suits, which usually sell for €900 to €1,100. “You wouldn’t be selling the flash stuff. All the property developers and all that kind of business are gone.”

Just off Grafton Street outside Marks & Spencer, O’Neill is just enjoying feeling “liberated,” she said.

“I sat down and went through all my direct debits, and cut over €500 from what we pay over a year,” O’Neill said. “We got rid of the luxury life insurance policy because I said we can’t afford to spend that in a recession.”