BoI: Consumer spending set to worsen

CONSUMER spending trends are likely to worsen in the remainder of the year, according to Bank of Ireland.

In its latest quarterly economic outlook, the bank said it has marginally widened its forecast for consumption declines for 2011.

“Consumer spending has surprised to the downside, with households cutting discretionary spending in response to a rise in prices, further falls in employment and another — albeit modest — decline in average earnings, and we now expect a 2.5% fall in the volume of personal consumption against our previous 2% forecast,” chief economist Dan McLaughlin said.

However, he added that any fall in domestic spending is likely to be off-set by another strong contribution from the external sector — although Bank of Ireland Global Markets has also trimmed both its export and import growth projections.

“The corollary to export-led growth is that multinational outflows are likely to rise and we envisage no growth in the GNP measure,” Mr McLaughlin said.

The bank’s latest economic bulletin also shows that it still expects to see the Irish economy — in GDP terms — to grow modestly, by about 0.5%, this year.

Mr McLaughlin said: “The Irish economy grew by 5.1%, in nominal terms, in the first quarter of the year and by 1.3% in volume terms, taking the annual change in the latter into positive territory. Moreover, revisions to past data now shows that the fall in GDP from 2008 to 2010 was somewhat less steep than previously thought and that the level of GDP last year was also higher than envisaged, at €156bn with a concomitant modest reduction in Ireland’s debt ratio.”

On the back of the fall in domestic demand, Bank of Ireland has suggested that employment may fall again this year.

Mr McLaughlin said the volatility in the Irish inflation rate, measured by the consumer price index, is largely driven by mortgage interest, energy and to a lesser degree, food prices.

“Mortgage interest has a 6.7% weight in the index and generally means that Irish inflation somewhat paradoxically moves in the same direction as ECB interest rates, at least initially.

“Irish mortgage rates have risen independently of the ECB over the past year, however, with lenders attempting to pass on the higher cost of Irish funding, with the result that in the 12 months to May, mortgage interest had risen by some 20% and contributed over 1.1 percentage points to the overall annual inflation rate of 2.7%,” he said.