Irish Household wealth climbs and debt falls

Irish household debt (defined as outstanding borrowings from financial institutions) peaked in late 2008 at €204bn and has been falling since, declining to  just under €150bn in the fourth quarter of 2015, according to the Central Bank, the lowest in a decade. The debt burden (debt relative to household disposable income)  has also declined significantly, to 155% from a peak of 215%,  although still leaving the Irish ratio well above the euro area average ( which is under 100%) and the third highest in the European Union.

No one can be certain at what point the deleveraging will stop but one factor which may impact is that Household wealth continues to recover, with the result that Household net worth has risen from a cycle low of €440bn to €626bn, the highest since early 2009. The upturn in wealth  was initially driven by rising equity markets ( boosting pension fund reserves) but over the last few years the recovery in residential property prices has been the made driver. Indeed, financial wealth actually fell in the latter half of 2015 but was offset by further housing gains.

Last year also saw a substantial rise in the (gross)  Household saving ratio, to 9.5% from 5% in 2014. On the face of  it then, Irish households are rebuilding savings, despite the meagre returns on deposits, and regardless  of a significant improvement in their financial position, at least in the aggregate, are still more comfortable repaying debt rather than borrowing.

Record rise in Irish Household real incomes in 2015

In the absence of some wild data revisions it would seem that the Irish economy grew by at least 7% in 2015, and a few weeks ago it emerged that tax receipts rose by 10.5%, providing further evidence that last year was indeed extraordinary in economic terms. The CSO  recently published figures on sectoral income and savings, taking in the third quarter of 2015, and they show that households also saw a spectacular growth in disposable income- indeed, in terms of spending power, the rise outstripped anything seen in the Celtic Tiger era, albeit coming after a longer series of declines.

Irish Household disposable income peaked in 2008 at over €100bn and then fell for five consecutive years, to under €86bn, a decline of some 15%, reflecting a plunge in employment, falling wages and a rise in average tax rates. Consumer prices were broadly flat over that period so the decline in real income was also around 15%.

The recovery in 2014 was modest, with nominal income rising by 2.7%, but last year saw a sharp acceleration; the annual pace of growth rose from 5% in the first quarter to over 8% in q3. Consequently, absent revisions ( which can be large) household disposable income probably grew by around 7.5% last year, fuelled by strong employment growth and an acceleration in average earnings. This would leave the nominal increase below that recorded in 2003 (7.9%) , 2005 (9.8%) and  2007 (8.6%), when employment growth and wage increases were stronger, but consumer price inflation was also higher over those years, so eroding some of the gains in real terms. CPI inflation in 2007 was 4.9% for example, and  2.5% in 2005. In contrast, the CPI index actually fell in 2015, by 0.3% , so in real terms the rise in disposable income last year is far stronger than recorded in the boom years.

The recession prompted households to boost precautionary savings and repay debt  with the  result  that the gross savings ratio (the proportion of disposable income not spent) rose from 5.8% in 2007 to a peak of 14.1% in 2009. Since then it has declined steadily, falling to 5% in 2014, although the strength of income growth last year seems have caused a significant rebuilding of savings, with the seasonally adjusted ratio rising to 10.3% in the third quarter and implying an annual figure of perhaps 8%.

The income and savings data confirm that households are in better financial shape than they have been for a long time and in that context it is perhaps less surprising to see consumer confidence at a 10-year high.