ECONOMICS: The near-term outlook for consumer spending is poor, but the pace of decline may be easing

AT ALMOST 60 per cent of total gross national product (GNP), consumer spending is a hugely important determinant of Irish economic growth.

In the first quarter of this year, household spending fell at a record pace and made a significant negative contribution to the economy’s unprecedented slump.

While consumer spending growth will remain under considerable pressure for some time, incoming indicators suggest that the most severe rate of decline may be behind us.

Quarterly National Accounts (QNA) data compiled by the Central Statistics Office provides the most comprehensive overview of the performance of the Irish economy. However, it suffers from one main drawback in that it is not timely. For example, the first-quarter data only became available at the end of June.

In the case of consumer spending, QNA data is the only source of information on total spending, ie spending on both goods and services.

In the first quarter of this year, household spending fell by a record 9 per cent and contributed some 5 percentage points to the unparalleled 12 per cent fall in GNP.

Clearly, the latest QNA numbers are somewhat dated, which is why analysts, including ourselves, look to other more up-to-date data to provide a steer on key economic variables. The most timely indicator of consumer spending in the Irish economy is the monthly retail sales report.

While this has the disadvantage of only covering approximately 50 per cent of total consumer spending (services are not included), its relative timeliness makes it a useful guide in tracking emerging trends in expenditure.

A key driver of overall retail spending is car sales, which account for about one-fifth of the total. Motor sales fell by a huge 60 per cent in January when compared with last year as demand for big-ticket items collapsed everywhere, including Ireland, at the height of the crisis.

Since then, car sales have recovered slightly and, while still down a significant 40 per cent in the year to May, are gradually becoming less of a drag on total retail sales.

Following a massive 27 per cent cars-driven fall in January, the rate of decline in total retail sales has decelerated for four consecutive months, to leave the rate down 15 per cent by May.

While this clearly represents a very weak performance, at least the trajectory has become less negative.

The slower rate of decline in total retail sales masks a disappointing deterioration in “core” retail sales, a measure that excludes the volatile car element.

The rate of decline in this measure had shown some signs of levelling off in the months leading up to the May report. But disappointingly, the latest figures failed to confirm signs of stabilisation. A weaker-than- expected month for sales in May, combined with downward revisions to previous data, drove the annual rate down to an all-time low of minus 9.2 per cent (records go back to the 1970s).

We had anticipated some weakness in core retail sales in May. After all, the tax hikes introduced in the April budget began to hit some pay packets during this period.

However, the extent of the weakness served to remind us that the headwinds facing consumer spending remain substantial.

The near-doubling of the unemployment rate over the past year, hitting 11.9 per cent in June, has seriously reduced the incomes of those who have lost their jobs.

The tax hikes introduced in the October and April budgets have also been negative for spending, as has the general downward pressure on wage levels across the economy. Furthermore, uncertainty surrounding job prospects and the economic and fiscal outlook has resulted in more cautious spending attitudes among those who have retained their jobs, resulting in a sharp rise in household savings rates.

All this said, the pace of decline in some key drivers of consumer spending has shown early signs of easing in recent months.

The latest Live Register figures for June showed an additional 11,400 individuals claiming unemployment benefit in the month, down from 33,000 additions in January.

Importantly, the deterioration in the Irish labour market, while still pronounced, may not be as great as had been previously anticipated, although some weak months cannot be ruled out in the period ahead.

A further support to consumer spending is the substantial fall in prices which, according to the latest consumer price index (CPI) figures for June, were down 5.4 per cent when compared with last year. The fall in mortgage interest rates has accounted for a substantial amount of the overall decline in prices.

However, prices in seven of the 12 price categories of the CPI were in negative territory in June. In this respect, it is fair to say that evidence of broadbased price falls in the Irish economy has emerged in recent months, boosting the purchasing power of any given level of income.

Clearly, the near-term outlook for consumer spending is poor, and it will take more than falling prices to bolster expenditure in the current environment.

However, a progressively less negative picture in this important area should help generate a similar pattern for the overall economy in coming quarters.

Lynsey Clemenger is an economist with Ulster Bank