Household Savings Rate Rising Sharply?

The CSO Index of Retail Sales had been rising to mid-Summer 2007, flattened for a few months and has been falling since October 2007, which was (just marginally) the sa peak. November 2008 was 8.1% off the peak, and October plus November combined down just under 8% on the same two months of 07. Today’s Sunday Business Post reports a survey by Retail Excellence Ireland and CBRE for the full fourth quarter. They believe that value of sales was down 10.7% over Q4 2007, and that the figure would have been even worse (14%) if the DIY and electrical sectors had been included in their survey, which seems to have a somewhat narrower coverage than the CSO’s inquiry. Nonetheless, the survey confirms anecdotal evidence that December was dire, and that Q4 volumes could be down anything up to 10% on Q4 2007. Some sales were brought forward into December, and the January figures could well be pretty poor too.

Notwithstanding the diversion of trade into NI retailers, consumer spending must be falling faster than household disposable income. There will have been a hit to income in Q4 from job losses, but not yet from tax increases. Pay rates (outside the construction sector) were still rising in Q4 so far as I can see, although they may fall in the private economy overall in Q1 2009. The implication is that the household savings rate rose sharply in Q4 08, and that the marginal propensity to save must be high. This is also consistent with the historic lows in the consumer confidence indices.

If the consumer has decided that it’s time to repair the balance sheet, the case for fiscal stimulus is even weaker than normal, which in Ireland is pretty weak to begin with. The corrolary is that fiscal tightening has even less output cost than the macro models indicate.

(Cliff, an SBP headline today contains the coinage ‘oversaturated’. Is this overexaggerated? When will the slaughter cease?).

12 replies on “Household Savings Rate Rising Sharply?”

Household savings is likely to rise during recessions (for those with jobs) and consumer spending will drop, that’s the paradox of thrift in action isn’t it?

everybody knows that they need to put something away for a rainy day -pity the state didn’t realise that too!

Colm, thanks for useful update on the numbers.

I found your closing conclusion a bit puzzling, however. It is usually thought that a falling private sector deficit needs to be countered by an increased public sector deficit (assuming the debt markets allow). While I can see why tax cuts would not work well when households are intent on restoring their balance sheets, I don’t see why government spending is subject to the same objection. There are good reasons that fiscal policy is constrained with a deficit at 10 percent of GDP. But I don’t think the case is as straightforward as you suggest.

Martin Wolf provides a good account of what I think is the conventional wisdom here:

I guess one thing the numbers suggest is that there would be aggregate demand benefits from having a bit of certainty right now. As one paper headline today put it, ‘give us the bad news now.’

John, I am very conscious of 1988, when people finally began to believe that the Irish Government was on top of the problem, and business/consumer confidence revived. We did’nt have confidence surveys then, but I think it was pretty clear that consumer and business spending had been restrained by the fiscal uncertainty. So I think it is important that the emerging deficit is restrained this year and heads decisely South next year. The sovereign debt markets are far more unfriendly now to countries borrowing 10% of GDP than they were in the 1980s, when only a few countries had big borrowing requirements. There should, specifically, be no presumption that Ireland will be allowed to run up the debt/GDP ratio to over 100% just because we were facilitated last time. Anyway, who wants to find out what is the max borrowing limit?

There is also the question of de-leveraging the national balance sheet, not helped if the private sector improvement is offset by the Government.

John, the fact that Ireland is a small and very open economy implies that we would need a very large expansionary fiscal impulse to stimulate the aggregate demand. By the same logic the government should have run a very large budget surplus during the boom which has not happened. As Colm says, confidence issues are very important at this stage. The Irish fiscal consolidation of 1987-1989 is frequently quoted as evidence for expansionary (non-Keynesian) effects of fiscal contraction.

Thanks Colm: There is no doubt we are in midst of a significant national de-leveraging. This is likely to be very destructive of the real economy. It is critical the the government is countering and not compounding the problem with its own balance sheet. Of course, there comes a point when a larger deficit makes things worse rather than better. You and others have convinced this point has been reached for the moment.

But I worry that 1988 provides a false analogy. At that time, a severe downturn had run its course. Possibly more importantly, the balance of deep structural forces began to shift, as the destruction of uncompetitive indigenous manufacturing gave way to the rise of the modern economy. I have never been convinced by the expansionary fiscal contraction hypothesis that is sometimes used to explain the turnaround.

All of this would be ancient history (sorry Kevin), except I worry it leads to a misreading of the current situation. With consumption and investment collapsing, this recession has an essentially Keynesian character. True, the government has no choice now but to demonstrate it is control of the public finances. And yes, it has already injected a massive stimulus through automatic stabilisers. The challenge now is to maintain creditworthiness with the least possible discretionary contraction. This requires success on many fronts: demonstration of government competence, effective social partnership where all sides are willing to compromise in the national interest, careful management of the banking crisis to minimise the shadow of the contingent liability, . . .

Sorry Iulia. I hadn’t seen your comment before responding to Colm. Your points are well taken. But I remain sceptical of the analogy with the 87/88 experience. Maybe others will weigh in.

John, Ireland Inc has ended up with a balance sheet which has (a) less net worth than it used to have, and (b) is still bigger on the liabilities side than is prudent in worldwide credit markets which may be unfriendly to us for a long time. It is smart to de-leverage in these circumstances, and the private sector is responding. The government is borrowing heavily this year, offsetting the private sector adjustment, but cannot prudently continue to do so. Plus the fiscal multipliers right now must be small. The shost-run MPC could be zero for all we know, and the MPM is huge anyway. It would be nice if our trading partners would reflate, but it is very risky for us.

A further point on John McHale’s comment. De-leveraging means that folks who bought properties in Ireland or abroad sell them to foreigners. Or the Government sells its foreign or Irish equity or property portfolios to foreigners, retiring some debt and shrinking the balance sheet. How is this ‘destructive of the real economy’? It is just a balance sheet manoeuvre in tricky credit markets, ask a hedgie.

De-leveraging also means pulling back on consumption and freezing investment to pay down debt. Colm’s numbers on retail sales are one very brutal outward sign. Its not just about changing ownership of the assets.

We have found before that the Retail Excellence Ireland surveys, while differing in detail from the CSO figures, do give a very good indicator of where things are going. I think the fall in grocery sales is particularly interesting ( may be some Northern Ireland impact here)

In terms of the debate of fiscal contraction and its effects, I think the growing risks of inaction need to be factored in, as Colm alludes to. In particular our bond spread versus Germany and the cost of insuring Irish debt both went up significantly last week. This is obviously due to the linked factors of our deficit and fears over the exposure of the government to the banks.

Being seen to start to get to grips with this will surely benefit us both in terms of consumers feeling a bit more confident that the government is getting to grips with things and in terms of international perceptions on financial markets etc.

How this will play out in the short term in terms of immediate negatives from cutting spending versus the confidence effect is a matter for some of the greater minds amongst you. We did get lucky in the late 1980s in terms of an international recovery helping us.

But whatever the international outlook, I think the risks of not getting to grips with this now greatly outweigh any fear of the economic impact of cutting spending. And I also think the consideration is different for a small player like ours than for the likes of the US and Britain.

Fair cop on the over-saturated, Colm .( though i did see you use ” headline” as a verb in a previous post !!)

Re 1987-93, there are also two devaluations that I would presume played a role then, especially given the nominal wage restraint implied by the first social partnership agreements.

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