After the bailout: the chastened consumer

In the last days of the boom we spent like kings. The bailout years have taught us to scrimp like paupers. Will waving goodbye to the troika give us back our confidence?

 

2006

Things could hardly have looked sunnier for Irish consumers in the summer of 2006. The savings scheme introduced by former minister for finance Charlie McCreevy in 2001 to encourage people to put cash aside for a rainy day – like that was ever going to happen in an economic powerhouse like Ireland - matured and poured more than €2 billion into the economy.

Extensions were planned, cars bought, holidays booked. By the end of August nearly 170,000 cars with 06 registrations were crisis-crossing the State’s motorways. This was an increase of 4.9 per cent on the previous year, which itself had been a bumper one for car sales. As the year progressed we spent €5 billion on six million trips overseas, which was an increase of almost 40 per cent in just five years.

In June, a report had shown that house prices had climbed 270 per cent in a decade, compared with inflation over the same period of 30 per cent. Thousands of jobs were being created every month and immigration was rising.

Ireland was the best little country in the world. The OECD told us it was true. So did the Economist and the Financial Times. And we loved it.

Adrian Shanahan is a consulting engineer from Kilkenny. At the height of the boom he employed seven people and had a lifestyle typical of the times. “We went skiing and took a summer holiday as well as a few weekend breaks. Planning them was never much of a concern, even though we were quite frugal.”

As a mortgage broker Karl Deeter spent 2006 riding the property wave. “I remember the day we cracked open champagne in the office after we closed €1 million worth of loans every day for a whole month.”

But at the year’s end The Irish Times published an article that rattled optimists. “If the experiences of economies similar to ours are anything to go by, we may be looking at large and prolonged falls in real house prices of the order of 40 to 50 per cent and a collapse of housebuilding activity,” wrote Morgan Kelly, a professor of economics at University College Dublin. Some saw Kelly as a killjoy, but he was right in almost every respect.

The economist David McWilliams had been making a similar point for some time. The author Julian Gough had also been writing about the inevitability of the collapse. “We were coming out of centuries of relentless, grinding national poverty,” says Gough. “When you’re poor you don’t need to cultivate a habit of restraint. You spend till you run out of money; you drink till you run out of drink. Poverty stops you killing yourself drinking, and lack of credit stops you killing yourself with debt. But give a poor society unlimited drink, or unlimited credit, and it’s likely to end badly.”

Dr Pete Lunn is an economist, neuroscientist and former journalist who has worked at the Economic and Social Research Institute since 2006. He spends his working days trying to understand our economic decision-making processes.

“We collectively fell for an economic illusion,” he says. Irish consumers were neither greedy nor stupid but relied too heavily on “extrapolation bias”. By this theory, people operate on the basis that the “best guide to the future is what has just happened, and back then all we had to look back on were boom times. It went on for so long that people stopped paying attention to past trends. There was no memory, either institutional or personal, warning us about what was happening.”


2008

Between 2002 and 2008 Irish households saw their disposable income grow by 60 per cent, and spending had risen with it.

But in 2007 house prices fell by more than 7 per cent. A sharp decline in consumer confidence followed. Car sales dropped. There were 1,748 new cars sold in October 2008, down 55 per cent on October 2007. Just two years earlier we had been buying almost 20,000 cars a month.

By 2008 Deeter’s mortgage business had started to falter. The doors stayed open, but the money coming through them fell by more than 90 per cent. The great calamity of 2008, however, was the bank collapse. “After Lehman Brothers we saw fear on the faces of people coming through the door,” says Deeter. “They were very dark days.”

In September 2008, just before the bank guarantee was announced, the Central Statistics Office released data that showed the economy had shrunk for two successive quarters and entered recession for the first time since 1983.

As the year ended, the scale of consumer panic became evident. The CSO recorded the sharpest decline in retail sales in more than 25 years, and its sales index recorded a drop of 4.5 per cent. Electrical goods were hardest hit, with a drop of 21.6 per cent, and the sale of anything related to property – furniture, white goods and so on – declined by almost as much.


2010

For the next two years the State reeled from crisis to crisis, and multiple tax hikes and budget cuts knocked consumer confidence. House prices plummeted, and by the end of the year almost one in 10 Irish mortgages was in arrears. A survey of income and living standards found that 60 per cent of consumers now had difficulty making ends meet. The troika came to town.

“There is the shame of it all,” read an editorial in this newspaper the day the EU, ECB and IMF troika arrived. “The true ignominy of our current situation is not that our sovereignty has been taken away from us, it is that we ourselves have squandered it.”

Lunn thinks this sense of shame is at the heart of the docility of the Irish consumer since the collapse. “In 2010, when we knew the bailout was required, there was a lot of talk of our loss of economic sovereignty, but I think a lot of that was borne out of sheer embarrassment and a sense of failure, and it was a pretty straightforward feeling of being humiliated,” he says.

Dermott Jewell was the head of the Consumers’ Association of Ireland through boom and bust. “Between 2008 and the end of 2010 I was sure we would see a major jump in membership as people looked to become more involved and to voice their concerns,” he says. “But it never happened. I still don’t know why. I heard many people expressing anger, but very few did anything real about it.”

Julian Gough says this reticence to rebel is to our credit. “What’s tragic is that some people have been destroyed psychologically by their losses. But what is marvellous is that most people have not been. Their identity was not tied up with their property; their self-esteem did not collapse along with their bank balance.”


2013

The worst of the shame has lifted now. “There has been a shift in the past couple of years and people recognise that they did nothing wrong or horrible,” says Jewell. “Irish people were not the cause of this calamity. Consumers just took out loans they were told they could afford and bought things they were assured were safe investments.”

One of the great puzzles of the crisis, says Pete Lunn, is that it does not appear to have had much impact on people’s happiness. “In past recessions there has been an easy to spot decline in the subjective sense of wellbeing of the people. But despite the scale of this recession people’s levels of reported happiness have not fallen.”

Unless consumers spend money there can be no real recovery. Since the economic collapse the amount of discretionary income has fallen by more than 20 per cent. Confidence ebbed away as people saved more and paid off their debt.

But a recent Consumer Market Monitor prepared by the Michael Smurfit Graduate Business School and the Marketing Institute of Ireland suggests a change of heart. Their most recent report, for the third quarter of this year, put consumer confidence at a six-year high, up five points in the first half of 2013. Karl Deeter says his mortgage business has picked up.

Few people think this weekend’s bailout exit will herald a new dawn or an end to austerity, and few think we will return to the worst excesses of the height of the boom.

“I am surprised and pleased we have got to where we are now and have met all the targets imposed on us,” says Lunn. “There is certainly greater optimism now, and exiting the bailout is key to that.”

But the bailout years have left their mark on many people. As a victim of the worst recession in the history of the State, Nora Lambert says she will struggle to get through Christmas. She worked in office administration for nearly 40 years until, in 2010, she became a statistic.

“I was made redundant,” she wrote in a letter to this newspaper this week. “Initially I was not so concerned about finding alternative employment. I was confident I would find work. Not so, this recession is by far the worst I ever have experienced.”

She applied for more than 600 office jobs before eventually getting a part-time post in 2011. This year she became another recession statistic after the company she worked for had to lay off staff. “I know that the probability of my getting work is less than likely,” she says

Adrian Shanahan, the engineer from Kilkenny, now works out of his basement and employs no one. “We have had a drastic change in our circumstances, but we just have to get on with it,” he says. He and his wife have slashed their grocery bill. “We used to be a bit frivolous. We used to spend more than €200 a week on groceries. Now it is less than €100.”

The couple have one child and another on the way. The adults have had to surrender their health insurance – they still have a policy for their son – and they “don’t go out any more, ever” but he is not complaining. “You can’t be too downhearted. There are people all over the world who are in a much worse situation than us. The bailout exit won’t make a blind bit of difference. The only change will be that our politicians won’t have the troika to blame any more.”


2016

So what happens next? Well, what has happened elsewhere? Just five years after a cataclysmic crash, Iceland is on its way to becoming one of the world’s richest countries again.

From 2009, a Left-Green government brought the country through an IMF bailout programme and “raised almost every tax there was – and introduced new ones”, recalled Steingrimur Sigfusson, who was minister for finance from 2009 to 2011. By August 2011 Iceland had left the bailout, confidence returned and spending boomed almost immediately.

Japan was not bailed out; its crash at the end of 1989 was almost as spectacular as ours but the outcome wasn’t as successful as the Icelandic experience. The property bubble engulfed every sector of the economy, dragging down several large banks, humbling many of its once world-beating corporations and miring the country in a decade of deflation and stagnation. The “lost decade” of the 1990s has gone down as one of history’s worst economic reversals, and the country is still dealing with the fallout.

Looking past Ireland’s bailout exit, certain facts remain. We have a chronic pension problem, a mortgage-arrears crisis that has improved only marginally in recent months, an unemployment crisis, and a return to emigration that has seen almost one in 10 people aged between 20 and 25 leave the country. Variable-rate mortgages have not fallen, and nor has the cost of childcare. Rent is climbing, as are the costs of health insurance, utilities and public transport. Water charges are in the pipeline, and the local property tax is a reality.

In this climate it is hard to be optimistic, but Lunn says the key question is whether consumers now know exactly what went wrong. “You need to think about the crisis as a jigsaw puzzle, and a big mistake would be to look only at individual pieces of it,” he says.

“I don’t think a future collapse could be on the same scale – that would be almost impossible, given the magnitude of what has happened – but we could make some of the same mistakes.”

The word “confidence” is on every politician’s lips this weekend. “If you are a consumer and are making a purchase that involves any degree of risk then you are much more likely to take that risk if you are confident,” says Lunn. “You know your decisions come with a certain risk, but you understand what you are doing.”

It’s an understanding that has come at a very high price.

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