The initially reported contraction in Irish GDP last year has now been revised away which alongside strong growth in the first quarter of 2014 has prompted forecasters to revise up their projections for the full year, with exports and investment spending seen as the main drivers. Consumer spending continues to disappoint, however, having fallen in q1 and the final quarter of 2013, so again dashing hopes of a recovery in that key component of domestic demand. The consensus still expects some growth in consumption this year, nonetheless, but the scale of any forecast rise is being trimmed back. Consumption largely depends on the trend in disposable income but the proportion of any given income spent and saved can and does vary over time. On that basis the recent trend in disposable income is encouraging but the trend in the savings ratio has also started to rise again, reversing the downward path evident since 2010, adding a further degree of uncertainty to the economic outlook.
Household spending is not uniform through the year and so the savings ratio also exhibits pronounced quarterly swings, falling sharply in the final quarter of the year, for example, and rising steeply in the first quarter. The CSO seasonally adjust for such moves and the adjusted figures for household disposable income and savings tend to be the focus of attention. Volatility is still high, however; disposable income fell by 4.8% in the first quarter of 2014, latest figures show, after a 3.8% rise in the final three months of 2013, but the change in consumption was much less pronounced (too modest quarterly declines) so the savings ratio fell sharply, from 15.4% to 11.7%.The implication is that households had to spend a higher proportion of their income in q1 to support spending in the face of a sharp fall in income.
The trend in these variables is more significant, however, and a 4-quarter total shows a different picture. The latest CSO figures now show that the declining trend in household disposable income bottomed in the first quarter of 2013 and the past year has seen an upturn in income, no doubt supported by the recovery in employment which is offsetting stagnant wages; the 4-quarter income figure in q1 was €90bn, the highest since late 2010 and compared with a cycle low of €87bn. A modest increase, leaving incomes well below the cycle peak of €102bn, but a welcome change in trend from the relentless falls seen since 2008.
The onset of the recession at that time and accompanying surge in employment prompted a substantial change in household behaviour. The trend in the savings ratio ( defined here as a 4-quarter moving average) rose sharply, from under 7% in 2007 to over 16% by the end of 2009.Most forecasters then expected the ratio to decline, particularly when the labour market stared to improve, and that duly unfolded, with a fall to around 10% by the end of 2012. That trend decline has come to a halt, however, with a pronounced upward drift of late, to 12.8% in q1 2014,, the highest since 2010.Households are still deleveraging, of course, and that is no doubt an influence, but household wealth is also rising again and the interest rate paid on savings products is unusually low, which might argue for a fall in the ratio.
I have noted elsewhere that the savings and income data are subject to substantial revisions , so the past year’s data may look different in time, but for the moment the trend in disposable income is positive although it appears households remain cautious about spending, despite other data showing that consumer confidence has recovered to pre-recession levels.