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Post-Covid spending spree is set to end as a harsh winter looms for Irish consumers

The spending phoney war will soon be over and retail and hospitality had better watch out

The months-long phoney war at the beginning of the second World War was a period of relative calm in western Europe. There were a few skirmishes here and there, but mostly the guns stayed quiet. Yet the majority of people understood it was only a temporary, illusory calm and that carnage was on its way.

There is a distinct whiff of a phoney war currently in the sentiments and behaviours of Irish consumers, that most hardy of spender species. You don’t need to be a bloodhound to sniff it out.

Restaurants, planes, hotels and shops are still fairly full. You must still beat your way through a crowd to get to the bar on a Saturday night and forget about securing a taxi home. But the continuing elevated level of household savings and the early signs that consumers are putting off expensive purchases, along with the national horror in recent weeks at rampaging inflation, suggest change is ahead.

Winter truly is coming for Irish consumers in a literal and metaphorical sense. The European Central Bank’s latest interest rate rise has blown cold in under the door. Underneath all the post-pandemic consumer bravado, we all know what is about to happen. Most haven’t battened down the hatches completely just yet, but it is blatantly obvious we will soon. Then, for the majority of us who are still engaged in this phoney war, it will really begin to feel like the economic crisis that it is.

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I often roll my eyes at the giddy neuroticism of Irish consumers: where else in the world would the opening of a Krispy Kreme or a Pret-a-Manger be a topic for national debate? But there also can be something to admire in our spending obsession.

Does anyone have any idea what is likely to happen to consumer spending once the gravity of what is taking place embeds itself in the minds of the public?

In times of plenty, the exuberance of Irish consumerism is overwhelming. But during or immediately after more difficult economic periods, many Irish people quickly emerge from their hideouts to spend heavily on fun. There is a relentlessness to it; this national determination to let nobody stop the craic.

Just look at the deep holes Irish consumers have gamely clambered out of during the last decade. It is true that consumer spending was obliterated during the 2008-2012 financial crisis — one senior retailer described it to me as the biggest collapse he had seen anywhere in the world for 30 years. But by 2013 onwards, the recovery was in train and soon Irish consumers were Europe’s most optimistic.

They had only just managed that feat when Brexit came along. It should have sent Irish consumers running for cover but, for the most part, it did not, even though we seemed never to stop talking about it. The pandemic’s arrival in 2020 only discommoded consumers for a few months before confidence returned. Irish consumers were again emerging from 2022′s Omicron waves with an ebullience almost unmatched in Europe.

But this year’s energy and inflation crisis feels different. The screaming has yet to start. But it seems reasonable to predict that as soon as the first winter heating bills land, Irish consumer spending will be drastically reined in, and for a prolonged period.

How could it not be? The ECB’s unprecedented 0.75 of a percentage point interest rate rise on Thursday, coupled with the half point rise in the summer, means the interest rate on many boomtime tracker mortgages has doubled in barely three months. And the ECB has signalled more pain is to come.

The changes in interest rates alone ought to be enough to frighten the lives out of consumers. Yet the interest rates have plenty of accomplices in this current battering of consumers. Grocery inflation is at its highest in 13 years. While people didn’t mind as much spending extra in supermarkets to fuel the barbecues of the heatwaves, it will be a different story as the school year resumes in earnest and the bills start piling up.

Ireland’s overall inflation rate may have moderated slightly in August to 8.7 per cent, but the upwards trajectory will resume as the days get shorter and the stratospheric rises in energy unit costs announced in recent weeks translates into higher bills through people’s letterboxes.

When have utility bills ever doubled or tripled in less than six months in the living memory of the majority of Irish consumers? Does anyone have any idea what is likely to happen to consumer spending once the gravity of what is taking place embeds itself in the minds of the public?

Early this year before the current crisis blew up, Ibec, the business lobby group, predicted that every 10 per cent rise in energy prices would lead to almost a 1 per cent fall in consumer spending elsewhere. With most electricity providers putting up prices by up to 40 per cent at a time, several times a year, it all adds up to a massive disposable income shock.

Businesses also know the phoney war is coming to an end. Last week, I spoke to scores of restaurateurs and hoteliers who all feared what the winter looks set to bring. The economic forces buffeting Ireland are an international phenomena. The evidence of the consumer crunch that is coming is writ large in the share prices of all sorts of consumer-facing businesses: Netflix has lost one-third of its share price; online retailers Asos and BooHoo have halved in value. The share price of Dalata Hotel group, Ireland’s biggest hotelier, is down by about one-fifth since June, even though it has just posted stellar results.

Suddenly, summer predictions from Ibec economists that consumer spending growth may “moderate” from more than 6.6 per cent this year to 4 per cent in 2023 are starting to look wildly optimistic. Most of Ibec’s membership would bite your arm off for that result if offered a guarantee of it now.

Irish consumers have proven remarkably resilient throughout several crises over many years. But they may be about to face one of their toughest tests yet, as will all businesses reliant on discretionary spending such as retailers and hospitality outlets.

Households have signalled their frugal intentions by maintaining current high savings levels even as real incomes come under pressure, with up to €150 billion now in the bank. They are going to need it for what lies ahead.