Consumer cheer?

Steady spending may help the economy to escape a recession that threatens to engulf the US and the UK, writes Laura Slattery

"We're not like them," is the message being sent to concerned consumers by economists, bankers and politicians alike this week.

The US economy may or may not have already sunk into a recession, the UK may be sliding fast, but Ireland is still a pretty comfy place for consumers to, well, consume.

"My house is worth 10 per cent less than it was, my employer is shedding staff and I'm paying 7 per cent more for food," aIrish consumer might reply to these assurances. But in the starkest of numerical terms, Minister for Finance Brian Cowen is forecasting 2.8 per cent growth this year. Even if the rate turns out to be closer to the 2 per cent predicted by some economists, other countries would happily settle for such a plump cushion.

One reason for the Republic's rosier condition is consumers themselves. While their counterparts in the UK and the US are far too nervous to set the tills ringing, Irish consumers are "holding up". Consumer spending is forecast to grow by 3 per cent in 2008, with the Central Bank predicting even higher growth of 3.5 per cent.

"Cautious but not completely terrified" is how IIB Bank chief economist Austin Hughes sums up consumer confidence.

The IIB / Economic and Social Research Institute (ESRI) consumer sentiment index showed that overall confidence improved in January after three months of declining sentiment, as consumers descended upon the winter sales and snapped up the best bargains on offer for years.

But this latest health check on the mood of the nation doesn't exactly make the case for unabashed optimism.

"The key question is whether the nervousness before Christmas led to the steep price cuts. It does seem like consumers didn't want to pay full price for anything and the retailers blinked first," says Hughes.

Despite the canny sales shopping, the traditional New Year bounce in appetites to buy big-ticket household items such as fridges and washing machines was smaller than in previous years. "There was no spending free-for-all," says Hughes.

And the next sentiment survey, due at the end of this month, may well reveal the gloomiest mood among consumers in the six-year history of the index, according to Hughes. When confidence tumbled to a record low in July 2003, it was a time marked by job cuts. This time, the clouds causing sentiment to darken are similar.

In January, the number of people claiming unemployment benefits rose 7,800 - the steepest monthly increase since 1980 - as the "Bob the Builder" economy unravelled a little further. But as dramatic as these layoffs and the sudden absence of cranes on the skyline might seem, consumer spending will be propped up by the growth in the size of the labour market, Hughes notes.

"Employment growth is expected to be 1 per cent this year. That's 1 per cent on consumer spending," he says.

Curiously, consumers paint a positive picture of their personal finances, while expressing fear about the economy as a whole.

"There is this huge sense of gloom about both the Irish and the world economy and yet at the end of the month, consumers are finding that they still manage to get by," he says.

Hughes believes it will take "a major shock" for consumers to pull back spending now. Retailers are still likely to feel the pinch, however. Last year, consumer spending rose 6.3 per cent. The spree was part-financed by maturing Special Savings Incentive Account (SSIAs). But again, this had been predicted to prompt a more extravagant bout of spendthrift behaviour.

The SSIA legacy is one difference between Irish consumers and their US and British cousins. Another is that Irish homeowners didn't use the equity in their houses to supplement their lifestyles in the same way as culturally more debt-accustomed UK and US consumers did.

In crude terms, refinance company advertisements were more plentiful and more persuasive across the pond than they were here. Either that or Irish consumers are far more sensible than they are given credit for.

"The cartoon view is that consumers don't know how much they are spending on their credit cards," notes Hughes. But while there may have been some recklessness "at the fringes" while the economy boomed, most people have been prudent. As interest rates rose, consumers became more likely to walk past the estate agent window without so much as a first glance.

Crucially for borrowers feeling the squeeze, the outlook for interest rates seems to be going in their favour. European Central Bank president Jean-Claude Trichet's tone has softened, shortening the odds of a rate cut.

Rate hikes, accompanied by ominously rising food and fuel prices, meant the Republic's inflation rate averaged at the high rate of 4.9 per cent last year.

Figures published yesterday show the annual rate has now dropped to 4.3 per cent. But for Paul Sweeney, economist at the Irish Congress of Trade Unions (ICTU), it is the "sticking" higher prices for food and fuel - which affect low-paid workers the most - that will be at the forefront of his mind when the ICTU enters the next round of wage talks.

"We're feeling a little bit stung about inflation, because the forecast last year was for prices to go up 2.5 per cent," says Sweeney.

Wages rose last year by 4.6 per cent, meaning incomes failed to keep pace with prices, he says. "There is a feeling now that we need to catch up."

In particular, consumers don't want to be told they must tighten their belts while those at the top are helping themselves to plenty of loose change, Sweeney adds.

It's been so long since the economy found its reverse gear, many consumers won't have experienced a downturn in their working lives, so how they will react is far from a sure thing.

Spending habits, once established, are hard to curb. But if consumers keep their wallets too firmly zipped, growth may crawl at an even slower pace. On that basis, the patriotic thing to do this weekend is to go shopping.