December Retail Sales imply Rising Household Savings?

The sa volume of retail sales peaked in Q4 2008. This morning’s release for December completes the 2008 picture. There were qoq falls from Q1 to Q4 of 1.8%, 3.3%, 1% and 2.2%. The Dec figure was 8% below Dec 2008.

The quarterly national accounts, available only to Q3 2008 anyway, do not give the income table, and we can only guess at the intra-year patterns. If consumption has followed retail sales volume, there must have been a sharp increase in the savings rate through 08. Household income cannot have fallen anything like 8%, and even in Q4 it is doubtful if the income decline was as much as the 2.2% quarterly fall in retail sales volume. The direct tax increases had not kicked in, and many enjoyed nominal pay rises from September as consumer prices began to fall, offsetting the income loss from employment contraction. Household income will possibly fall more rapidly in Q1 2009, since unemployment seems to be rising faster; direct tax hikes are kicking in; and there seems to be a pay-reduction round going on in the private sector. If the savings rate continues to rise, the implication could be dire retail volumes for a while yet.

Here’s a question: the figures coming out since year-end have been pretty poor overall, suggesting that activity is declining even faster than feared. Does this mean that the downturn could be shorter? Is it the case that there is a given (given by world trade volumes, real exchange rate and competitiveness) macro-correction of x% to be endured, but x does not get bigger just because the economy gets through it faster?

12 replies on “December Retail Sales imply Rising Household Savings?”

I don’t think it’s going to be shorter Colm. I’m not sure there’s such a thing as ‘economic gravity’ but it seems to me that the higher you shoot above the ‘long run trend’ then the further the overshoot on the way back down. Which inclines me to think that the speed and scale of the current contraction in consumer spending points to a deeper and longer recession than in previous instances – rather than anything shorter.

I am struck though by your point about the savings ratio. The European Commission’s forecasts last month showed Ireland having the highest savings ratio of any EU country this year and next. Following on from this, might we see an enormous surge of deposits in banks (€10 billion this year alone, say) that sorts their balance sheets out more rapidly than anticipated?

Now that might just shorten the recession after all …


Is it possible that a small but significant amount of retail spending is not tracked correctly, as it is spent cross-border and/or on the internet? I would imagine that both of these destinations for consumer spending were at a peak in December.

The fall in real consumer spending has not been as great at all as the decline in the volume of retail sales, at least up to the third quarter of 2008… in the year to Q3’08 real consumer spending fell by 1.3% versus a decline in the vol of retail sales of 5.5% over the same period….nominal consumer spending, which is what is relevant in the calculation of the saving ratio, rose by 2.5% in the year to Q3’08.

Colm, your conjecture might be right if the speed of improvement in competitiveness is the dominant factor driving an improvement in Irish fortunes. We could then think about exogenous paths for domestic demand. Weaker domestic demand would lead to higher initial unemployment, a faster reduction in relative wages, and a speedier to return to export led growth. My fear is that domestic demand could follow some very ugly path dependent dynamics, with the possibility of a vicious cycle as confidence is lost. There could also be an adverse interaction between demand and the fiscal situation. No easy answers.

But nominal income looks like it was still rising earlier in 08 Michael. Anyway the peak for nominal C was Q4 07, not Q3. Since Q4 07, nominal C is off 6.5% (to Q3 08) and presumably more to Q4 when the figs come out.

Colm, dont want to labout things and saving rate must be rising…but are u looking at non-seasonally adj data?…. sa data show nominal C peak in Q1’08 with a modest enough fall through to Q3 (of less than 0.5%)

Suppose Y (max) was several quarters ago, and Y is falling to some unknown nadir at Y*. All policy variables have been set.

If Y* = f(competitiveness, world trade), and nothing else, then the faster Y falls, the sooner Y* is reached. But if Y* also depends on (falls with) the speed of decline of Y, as John McHale points out, things get ugly, and you start thinking about a new setting for policy.

Is there any evidence from recent (say Finnish or Swedish0 episodes in modern economies on this? Does a rapid fall in Y tell us that competitiveness is improving, not given?

I wonder if your question be considered equivalent to: How much of our marginal propensity to consume is spent on imports as opposed to home grown products?

In a small economy, can we be hopeful that it is our imports that are plumetting with only a small affect on domestic demand? It seems a bit optimistic.

Gerard, increased savings will be temporary. As we continue to sack each other (stopping purchases in order to save money) our unemployment will keep rising and the savers will be hoist by their own petard.

Continuing from my comment minutes ago, and on a related note from the US: “Consumers Cut Food Spending Sharply”

Assuming people in southern Ireland follow this route, trying to save money on their food bill, this will surely cause even more unemployment. Meaning fewer people to spend money, and so on. Just when we should be cutting back on imports of luxuries, we might stop even buying food off each other.

People of Ireland: Please don’t start saving, now of all times!

The sales figures for December were already headlined by the monthly credit card figures published by the Central Bank. It is not so much an increase in the level of saving, rather a decline in borrowing.

Dec 08 spending on credit cards was 4.1% down on a year earlier and Nov 08 spending on ccs was 16.8% down on Nov 07. Payments made in Dec 08 were 118.9% of Nov 08 spending.

Aaron – Where is southern Ireland??

Southern Ireland = the Republic of Ireland = the 26 counties of Ireland that are not in Northern Ireland (aka the North). Northern Ireland, being outside the eurozone, is benefitting nicely from a devaluation in sterling.

I was tempted to put quotes around ‘saving’ at times in my comments. Either way, a decrease in consumption of Irish goods and services is bad news.

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