Consumers saving and paying off debt rather than taking out new loans

Repayments on personal credit cards exceeded new spending during July, as they have done in all but one month so far in 2009, while outstanding residential mortgage lending fell by €71 million during the month – the fourth consecutive month of decline.

Overall, lending to the private sector fell slightly in July compared to June, the fifth consecutive month of decline, the Central Bank monthly statistics show.

However, the effect of ongoing writedowns of loans and increased provisions against bad debts meant the headline stock of private-sector credit on the balance sheets of credit institutions fell 2.2 per cent in the year to July.

This marked a continuation on the annual decline first recorded the previous month, when private-sector credit declined 0.7 per cent.

The €3.7 billion decline in private-sector credit during the month of July compares with monthly falls of €1.6 billion in May and €1.4 billion in June.

A decline of €2.1 billion in credit outstanding to non-financial corporations was the main reason for outstanding credit falling in July. The stock of outstanding household credit also declined – by €404 million – mostly as a result of a fall in consumer credit.

The Central Bank data shows that the number of credit cards in issue was static in July. New spending on personal cards during the month amounted to €913.6 million, while repayments on personal cards exceeded this at €934 million.

Interest payments meant that outstanding indebtedness on personal cards still crept up during July, from €2.89 million to €2.91 million. But the annual rate of increase in credit card indebtedness, at 1.2 per cent, has fallen sharply over the past year.

Meanwhile, the annual rate of increase in outstanding residential mortgages declined to 1.2 per cent in July, down from 1.9 per cent in June, and is expected to turn negative by the end of 2009.

A breakdown of deposit data shows that overnight or demand deposits held at Irish credit institutions increased by €555 million in July, while deposits redeemable at notice of up to three months rose by €633 million. Deposits with an agreed maturity of up to two years fell by €230 million.

Alan McQuaid, an economist at stockbroking firm Bloxham, said it was clear from the latest figures that consumers were saving and paying off debt rather than taking out new loans.

However, he said some of the decline in private-sector credit was “likely down to the fact that credit from banking institutions is no longer freely available” as it was during the years of expansion.

“Still, demand for credit remains weak as consumers continue to fret about the underlying health of the economy and job prospects in particular,” Mr McQuaid said.

“Indeed, until there are clear signs of a stabilisation in the labour market, the year-on-year change in residential mortgage lending and private-sector credit as a whole should in our view turn more negative.”