Following the recent revisions to the Irish National Accounts it appears that the recovery has been stronger and less volatile than previously reported, leaving real GDP in the first quarter of 2015 3.9% above the pre-crash high. Forecasts for economic growth this year are also moving up, including revisions to estimates for consumer spending, but the latter may still be too low in our view as we expect real personal consumption to rise by 4.2%. This compares with the Department of Finance’s 2.4%, the Central Bank’s 2.3% and 2.0% from the ESRI, although all these were made before the release of the official Q1 data.
Forecasters have generally become cautious about consumer spending in the wake of previous projections which had proved optimistic, in part because of the uncertainty about the pace of debt repayment by Irish households. Debt peaked in late 2008 and has fallen by almost €50bn to stand at €154.6bn in the first quarter of 2015. This is still high by international standards , at an estimated 166% of disposable income, but is a far cry from 211%, the debt burden at the peak of the cycle.
So debt reduction rather than debt accumulation has been a key feature of Irish household behaviour over the past seven years, which has acted to dampen consumer spending. A corollary is that the gross savings ratio has risen sharply. from 7% of disposable income in 2007 to a peak of 16.7% in 2009 and a 12%-13.5% range in recent years.
The published data on consumer spending has also appeared at variance with that on retail sales, with the latter implying stronger spending than actually recorded in the national accounts. One factor here is the impact of tourism, which affects retail sales but is excluded from Irish consumption. Another issue is the price deflator used to adjust nominal spending to derive real personal consumption. That deflator has been much higher than either the deflator for retail sales or from the CPI, and probably reflects the inclusion of imputed rent in the personal consumption measure, as private sector rents have been rising at an annual 8%-10% for the past few years.
Yet recent developments still point to a strong pick up in consumer outlays. First, spending over the past few years has been revised up, and has risen consistently for the past eight quarters, with an acceleration evident in the second half of last year. Second, spending grew by 1.2% in the first quarter of 2015 and at a 3.8% annual rate. Third, retail sales have been much stronger this year, boosted by a surge in car sales ( up some 31% in the first half of 2015) . Fourth, sales excluding cars, a better proxy for overall consumption, have also grown at a robust pace, with the annual increase accelerating to 6.6% in the second quarter from 5% in q1. This implies a stronger annual increase for personal consumption in q2, even allowing for the rental price effect.
A number of other factors also support the case for stronger consumption. Household income is now growing, expanding by 3.2% in 2014 following a 1.1% advance the previous year, and is likely to continue to grow at a faster pace this year , given the ongoing rise in employment and signs that wages are starting to pick up. Consumer prices are still falling, which also will help and household wealth is recovering, having risen by €154bn or 35% over the past two years. It is impossible to gauge when household deleveraging will end, but on the recent evidence the impact of debt reduction on personal consumption is being more than offset by a number of other developments, all supporting stronger personal consumption .