Irish household savings ratio continues it decline

The household savings ratio, the percentage of disposable income not spent on personal consumption, can be seen as a residual in the national accounts and in Ireland’s case is subject to sizeable revisions. Consequently it is not a robust  base for an economic projection yet many  forecasts are in part predicated on changes in the ratio and the widely held expectation that Irish consumer spending will pick up this year and next  explicitly or implicitly assumes a fall in the ratio i.e. that households will make a conscious decision to spend more from a given income. In fact, as the latest CSO figures reveal, the ratio has been falling steadily since 2009, and that against a backdrop of a declining trend in consumer spending.

The CSO figures refer to gross savings which are defined as that fraction of gross disposable income not spent, so it does not equate directly with a flow of money into savings products. The use of income to repay debt, for example, would class as saving on that definition, and we know from other sources that households have in fact been deleveraging for some time. The decision to save is also likely to be influenced by a host of other factors including interest rates, changes in the tax system, inflation and the state of the economy, with high and rising unemployment often seen as a catalyst for higher savings as households react to uncertainty. Similarly, an improvement in the economic climate and a decline in unemployment is viewed by forecasters as likely to precipitate a fall in the savings ratio and hence generate a rise in consumer spending above that indicated by the change in disposable income.

Gross savings fell in Ireland  at the peak of the boom, declining to under €6bn in 2007, but rose sharply over the following two years following the onset of the economic and financial crisis, exceeding €15bn by 2009. Savings in that year amounted to over 16% of disposable income (against a ratio of only 6% a few year earlier) but  the ratio declined steadily from there and fell back into single figures last year, at 9.4%.

The actual amount saved annually has also fallen steadily, to just over €8bn last year, but Irish households have also seen a significant decline in disposable income , which fell again marginally in 2013 to under €87bn from a peak of €102bn in 2008. Consumer spending has also fallen since the peak of the boom and the decline is therefore not driven by a rise in household saving- the weakness in consumption over recent years clearly reflects pressure on household incomes rather than any surge in precautionary savings. Indeed, the  fall in the savings ratio can be seen as households seeking to contain the fall in consumption by dipping in to savings.The savings ratio is still higher than it was prior to the crash, it must be said,  but is probably not the font for additional spending envisaged by many forecasters, including the IMF. The scale of data revisions also cautions against hanging any projection for an upturn in consumption on a change in the ratio.