Will rising rates squeeze Irish shopping public?

Ground Floor: A friend of mine was heading off to a party a couple of weeks ago and we were discussing the not-unimportant question of what she was going to wear. Although the talk was fairly wide-ranging, the decision had, in fact, already been made, a dress she'd bought last year, she told me.

She'd had a lot of expenses in the past few months and was feeling a bit overwhelmed by the amount of money she was spending. She had more important things to worry about than buying a new dress that she'd probably only wear once or twice.

Is my friend the only sensible person left in the country? Or is she stupid not to say hang the expense and treat herself to another one-night-stand dress?

From the most recent statistics published by the Central Bank it would certainly seem that most other people would ignore the increased outgoings and trot off to Brown Thomas or Dundrum with their credit card at the ready and not only splurge on the dress but the bag, shoes and some bling, too.

If my friend had hightailed it to the shops she would have been part of the €6.6 billion that Irish consumers shelled out on credit in May this year. Private sector credit has gown by almost 30 per cent in 2006 and, for the first time, we borrowed as much for goods and services as we did for houses. Both mortgages and term loans were up by €2.2 billion, while short-term loans and overdrafts together came in at €2.2 billion as well.

Earlier in the year economists were talking about the splurge effect of the SSIAs into the economy, but that was actual cash into our hot, sweaty palms with which to buy whatever consumer goods our little hearts desired. It seems that we've decided to borrow on the back of the expected income or supersize our SSIA spending with borrowing. As my mother used to tell me with monotonous regularity when I was a small and rebellious child and went against her better judgment - sooner or later it'll all end in tears. She was often right. But not always. Sometimes I got away with it. But more often than not I came home bearing battle scars.

Are there battle scars ahead for the Irish consumer? Or are we still the powerhouse of Europe, blessed by demographics that will keep everything rolling along merrily no matter what?

The Irish economy might still be streaking ahead of our European partners but perhaps they are starting to hit back. Euro-zone manufacturing activity is at a six-year high. New orders are strong and retail activity is up. The ECB is keeping a watchful eye on inflationary pressures but everyone is probably pleased to see signs of real growth at last.

And there's the economic impact of the World Cup to take into account too. Back in March, ABN-Amro published a research document which postulated that a Germany v Italy final (obviously they hadn't looked at the draw!) would be the top billing economic boost for European economies by imparting confidence into two big players (in both economic and footballing terms).

Not only that, they said, but consumers are more likely to feel upbeat and spend after a good performance from their teams and countries attracting attention find it easier to generate new trade and investments. Not Germany v Italy, obviously, but an all-European final is a good result for the euro-zone economies generally.

The Germans, regardless of their ultimate placing in the tournament, have certainly been marketing the country for all it's worth over the past weeks in order to get the most bang for its euro in terms of return on the World Cup investment. And while the Germans themselves were initially downbeat about everything to do with the soccer extravaganza, the progress of the team has definitely paid off in terms of consumer optimism. Gfk market research, based in Nuremberg, said that its "propensity to buy" indicator - which shows how likely it is that consumers will buy big-ticket items - is at its highest level since 1980.

It is, of course, about time that Germany lumbered back into economic growth. But if that happens, where will it leave the Irish and our insatiable desire for credit?

In his vastly entertaining book, The Pope's Children, author David McWilliams points out that part of the reason for our easy access to bundles of cheap credit has been the fact that the big European countries haven't been borrowing. And so German consumers simply put their money in the savings banks and stayed at home to watch TV while the Irish partied. If the Germans decide they want to party too, if they suddenly get up out of the armchairs and into the streets and start demanding loans from the banks to celebrate the performance of the soccer team, there won't be as much money to go around. There are an awful lot more Germans in the euro zone than Irish.

And, as has already started to happen, interest rates will go up. The question that nobody in Ireland can answer at the moment is whether, when they do, the Irish consumer will be able to shrug off the disappointment of not being able to buy extra party dresses, like my friend, and channel their money into less frivolous pursuits. Will we stop spending our Sundays in DIY stores, plasma screen retailers and car showrooms?

Will our sense of self-worth and optimism disappear like an English player's confidence at a penalty shoot-out? Or will we just have to qualify for the World Cup ourselves next time?

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