Consumer spending to rise inexorably

Economics: It appears that household incomes in the Republic are growing at a much faster pace than previously thought, with both employment and wages ending last year at levels well above consensus expectations.

The implication is that consumers have a substantial amount of spending power at their disposal, irrespective of the sums available in the Special Savings Incentive Accounts (SSIAs), which begin maturing in just over 12 months' time.

Employment growth in the economy, which had soared in the 1990s, slowed sharply in the early years of the new millennium, although it still remained positive.

The low point of the employment cycle occurred in the third quarter of 2002, when the annual rate of jobs creation slowed to 19,000 or 1.1 per cent, but the following year saw a gradual acceleration, with 28,000 jobs created in the 12 months to the third quarter of 2003.

A steep change occurred at that point, however, with Irish economic growth accelerating strongly, generating a much higher level of labour demand.

Consequently, annual employment growth rose to 47,000 in the final quarter of 2003 and averaged 50,000 in the first three quarters of 2004.

The final quarter of last year was stronger still, with an extraordinary 65,000 rise in employment, taking the total to a record high of 1.89 million. In percentage terms, this translates into a 3.6 per cent increase on the year, the best performance since late 2000.

Indeed, the latest figures included a 10,000 fall in agricultural employment, so some 75,000 jobs were created outside the agricultural sector, a gain of more than 4.5 per cent.

Much has been made of the increase in construction jobs (27,000 over the year), but the service sector saw most of the employment growth in 2004. Financial services, for example, generated 17,000 new jobs, followed by retail, where employment rose by 8,000, and the health sector (7,000), with 11,000 jobs also created in other services.

The good news even extended to the industrial sector, which saw a 4,000 advance, modest in itself but a welcome departure from the downward employment trend of recent years.

The labour data also contained a surprise on the supply side, showing a 65,000 rise in the labour force - again, much stronger than anything seen since 2000. Migration played a role, but the participation rate is still rising, contrary to much received opinion, with a notable increase in the over-45 age group. This rise in the numbers available for work suggests that the labour force can continue to expand at a rate well in excess of previous expectations, with the implication that the economy can sustain growth at a faster pace than most envisage.

The labour market is clearly very tight, nevertheless, with the unemployment rate down to 4.2 per cent - well below the 5.5 per cent rate consistent with full employment, according to the Organisation for Economic Co-operation and Development. This has driven up wages in the private sector, particularly in the more buoyant industries outside the manufacturing sector.

Weekly pay in construction, for instance, rose by 6.8 per cent in the year to the third quarter of 2004, with earnings growth in the financial sector accelerating to 7.5 per cent.

These are strong figures and were compounded by the trend in the public sector, which of course has benefited from the benchmarking awards; public sector pay rose by 9.3 per cent in the 12 months to September 2004, taking average earnings to €42,000.

Overall, annual pay in the economy probably rose by almost 7 per cent in the latter months of 2004, and by more than 6 per cent on average in 2004, which compares with previous estimates of around 5 per cent held by most forecasters.

For households, the picture that emerges is one of very healthy income growth. Employment rose by 3 per cent on average in 2004, which, allied to the buoyant wage trend, generated total income growth in excess of 9 per cent.

By the end of the year, moreover, the figure had accelerated to more than 10 per cent, which makes the 18 per cent rise in January car sales less surprising.

In cash terms, household income in the Republic is increasing by more than €7 billion per year, so the trend in consumer spending is likely to be extremely strong over the next few years, regardless of what proportion of the €15 billion held in SSIAs hits the streets.

It is conceivable that consumer spending could rise by 8-10 per cent per annum in nominal terms, based on income growth alone.

The accounts mature over a 12-month period starting from April 2006, so it would be a reasonable assumption to allocate €3 billion in additional spending to 2006 and 2007 on top of the underlying income-driven consumer spending.

On that basis, it is possible that spending could rise by 12-15 per cent in nominal terms in both years, or by 9-12 per cent in volume terms.