Over the course of the first six months of 2014 numerous indicators have suggested that consumers are showing an increased appetite towards spending. This follows a period in which consumer spending fell by 10% since the crisis, with retail sales having fallen by as much as 25% from the peak at one stage.
The reversal in some consumer indicators has been impressive. Consumer confidence rose to its highest since early 2007, car sales grew by 27% in the first five months of the year and retail sales volumes are growing by 6% year-on-year. Traffic volumes, an anecdotal yet important indicator of economic activity, are growing again.
Given the improvement in the labour market over the past 12 months and the stabilisation in disposable incomes, one would expect such a recovery in consumer spending.
However, while headline statistics can tell us how consumer trends may be faring in general, it tells us nothing about how widespread this recovery is. Divergences between consumers, geographically, by age cohort, or otherwise, are sometimes glossed over as a result of trying to find a simple narrative on the “Irish consumer”.
A recent poll by Red C for the Sunday Business Post captures the situation of what we like to describe as the “haves” and the “have-nots” quite well. The good news is that 69% of those consumers surveyed believe that an economic recovery is underway in Ireland.
The bad news is that many consumers believe that the perceived recovery is doing little to benefit their own financial position, with 28% described as struggling. A similar proportion (31%) claim to be living comfortably, with the other 41% neither struggling nor living comfortably. Consumers in the 35-54 year-old cohort, most likely with debt and children, are experiencing the most difficulty.
These conclusions make sense. It has been said that “the country went mad borrowing” in the 2000s, but this statement is factually incorrect. Some did, and in a big way, but only half of households actually have any mortgage. Some 20% of mortgaged households are in some form of repayment difficulty — a very high number — but this implies that 80% = of households are not having mortgage debt problems.
Another aspect of the story of Irish consumers is in the labour market, where the recovery has a multi-speed dimension to it. For example, the unemployment rate has fallen to close to 10% in Dublin, but, in the south-east, the unemployment rate is 16%. Similar divergences have occurred in earnings. It has become commonplace to argue that pay cuts have been widespread, but the statistics don’t back up this particular claim.
A study by economists in the National University of Maynooth, published last year, revealed that the proportion of workers receiving pay increases never dipped below 40% throughout the crisis years. At the same time, over half of workers experienced wage cuts in the 2009-2011 period.
The essential point here is that the recovery in consumer spending is not going to be an even one. It is fair to say that consumer attitudes towards perceived value have changed. Even if some consumers were not overly affected by the crisis, it is likely that the fate of others and the changed environment since 2006 has triggered more frugal attitudes and less propensity for excess. This is an important principle that retailers must adhere to; Irish consumers are a price-sensitive lot.
The good news for retailers is that an improving economy and labour market should benefit consumers over the coming 18 months. Water charges look set to be the last major fiscal measure that will negatively affect consumer’s disposable incomes. A better outlook is in store in general, but finding an “average” Irish consumer is a difficult task.
Dermot O’Leary is chief economist with Goodbody (Joe Gill is away).
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