Credit boom keeps good times rolling

Irish consumers are not so much loosening their belts as bursting out of their designer jeans.

Irish consumers are not so much loosening their belts as bursting out of their designer jeans.

There's no denying it - the feel-good factor has arrived for a large proportion of the population and self-denial has been abandoned. Wages and disposable income have increased substantially in the last decade, tax rates have been cut for three consecutive budgets and more companies than ever are willing to provide credit. Robust employment growth is another factor driving private consumption, along with what the Central Bank calls "buoyant consumer sentiment". But is the current spending spree an issue to be concerned about or can it be explained as catching up with the other rich economies?

Prof Philip Lane of Trinity College Dublin published a research paper recently on incentivising saving. By his calculations, personal credit has grown in real terms by 250 per cent since 1993. "Although average household debt may not yet be out of line relative to European norms, it seems likely that some groups, and under-35s in particular, may be financially vulnerable in the event of an economic downturn," he said.

In addition, ESRI figures show that the savings ratio has declined sharply from 9.6 per cent in 1998 to 6.4 per cent in 2000. People without medium- term savings would have nothing to fall back on if their income was hit.

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Clearly, the rate of credit growth is much faster than the rate of income growth, and a relatively steady low interest rate environment has made borrowing more affordable. This is set against a backdrop of optimism and a belief among borrowers that their salaries will rise instead of fall. Prof Lane believes that the consumer reaction to the buoyant economic conditions is justified, but the scale of that reaction may not be. So what does the Central Bank think? In its latest quarterly bulletin, the Bank said it was continuing to advise financial institutions on the need for greater caution.

"Financial institutions must be prudent in accommodating further increases in credit, given the very large increase in borrowing that has occurred in recent times," it said.

The basis for this concern, the Central Bank has stated, is that the economy is increasingly vulnerable to a sharp slowdown in growth, which could be triggered by events outside Irish control.

In the meantime, there are more and more reasons for people to borrow and spend instead of save. Personal lending interest rates have been almost static at around 10 or 11 per cent for the last five years, making the average consumer with a short memory comfortable and confident enough to keep borrowing. Deposit interest rates are so low that there is no incentive to leave money in the bank. There seems to be a general lack of awareness about investment options outside cash and property. Much is made of the fact that so many people bought Eircom shares, but that is only one stock and it has taught first-time investors more about the drawbacks than the rewards of equities.

And let's not forget property prices. The phenomenal increase in property values may be a cause for depression for first-time buyers, but what about the hundreds of thousands of homeowners who are already well established? They probably spend more on cappucinos than on their mortgage each month, while their properties have doubled in value within a few years. It's hardly surprising that this group feels free to borrow significant amounts against the value of their homes.

The bottom line seems to be that as long as economic growth remains robust and well-managed, and nothing drastic happens either in the US or Europe or anywhere else that might have a knock on effect here, we can keep on borrowing and spending to our hearts' content.

If, on the other hand, there is any adverse shock and we suffer a reversal of fortune, the more extravagant consumer behaviour has been, the harder we will feel it. Rainy day - what rainy day?