The tills are alive with the sound of spending

Economics: The hysteria over house prices and the hand-wringing over housing output have obscured the fact that the Republic is in the midst of a sustained consumer boom. The surge in household spending is the principal factor driving the economy towards a growth rate approaching 5 per cent this year, writes Paul Tansey.

The growth in real consumer spending on current goods and services began to accelerate in 2004.

During the three years between 2004 and 2006, the volume of current consumer purchases increased by a cumulative 18 per cent. The national spending spree is set to continue this year, with the Economic & Social Research Institute (ESRI) forecasting a further 7.8 per cent addition to consumer spending volumes in 2007.

Trends in retail sales so far this year support the view that the tills are alive with the sound of spending.

In the first five months of 2007, retail sales volumes were 7.7 per cent ahead of levels attained in the first five months of 2006. During the month of May alone, sales volumes were almost 10 per cent higher than a year earlier.

Retail sales comprise almost half of all personal consumer spending on current goods and services measured in the national accounts. As a result, trends in retail sales volumes are often an important indicator of the emerging shape of overall consumer spending.

Retail sales are concentrated in three areas of broadly equal size: sales through supermarkets and department stores; motor sales, including fuel; and sales through other, often specialised, outlets. Together, these distribution channels account for more than 90 per cent of all retail sales.

Even a cautious interpretation of trends and forecasts indicate that, in 2007, real consumer spending on goods and services will be more than a quarter higher than in 2003, while over the same period, retail sales volumes will have risen by more than one-fifth.

While not matching the explosion in consumer spending during the late 1990s, this still constitutes a consumer boom of considerable proportions.

The revival in consumer spending after 2003 can be traced to three factors: rapid employment growth; rising incomes; and, more recently, the release of funds from Special Savings Incentive Accounts (SSIAs).

Between 2003 and 2006, the numbers at work increased by 228,000, rising from 1.811 million to 2.039 million. Despite the downturn in housebuilding, total employment should still increase by some 50,000, or 2.5 per cent, this year. On this basis, the numbers at work will have risen by 15 per cent between 2003 and 2007.

Moreover, the increasing numbers at work have been earning more. ESRI data indicate that economy-wide earnings will have risen by 23 per cent between 2003 and 2007. Over the same period, the cumulative increase in average consumer prices is estimated at 14.2 per cent. This suggests real income gains of more than 10 per cent for those at work over the past four years when tax cuts are factored into the income equation.

The third contributor to the boom has been the release of SSIA funds. In the 12 months ending in April 2007, more than € 16 billion was paid out to savers. In April 2007 alone, €7.5 billion was disbursed to more than 500,000 SSIA holders. This payout was equivalent to 9 per cent of all consumer spending during 2006.

In recent years, growth in the Irish economy has been driven almost exclusively by domestic demand, with net exports - exports less imports - making a trivial contribution to economic expansion. Consumer spending is the largest component of domestic demand. In 2006, consumers spent €82.5 billion on purchases of current goods and services, equivalent to 53 per cent of all domestic expenditure. The amounts consumers spend on day-to-day goods and services swamp capital spending on new house purchases every year.

Capital spending on dwellings in 2006 - a record year for housing output with 93,000 completions - totted up to € 23.2 billion. Total capital spending on housing accounts for 15 per cent of domestic demand, valued at €155 billion last year.

Capital spending on dwellings not only includes new building, but also conversions and extensions by both the private and public sectors.

Thus, even in a record-breaking year for housebuilding, consumer spending on goods and services was 3½ times higher than all capital spending on housing.

This comparison lends a degree of perspective to the relative importance of consumer spending and housing construction in the national economy.

With housebuilding now heading south and the Government applying the brakes to public spending, it also illustrates the extent to which economic growth in the near term will become more dependent on consumers regularly emptying their wallets.