Is it a soft spot or a slowdown?
As the Government prepares to deliver the budget, the signs are there that consumers are starting to reduce their spending. As the cost-of-living crisis drags on and interest rate increases feed through, this should not come as a big surprise. But with some uncertainty about export trends, too, the outlook for growth is suddenly more challenging.
The difficulty with forecasting these things is that the official data only confirm them afterwards. Recent retail sales figures show a choppy picture of ups and down; spending remains above 2022 levels and has grown significantly since before the pandemic, driven by the rise in the number of people at work but also by an increasing population.
There have been ups and downs in the consumer mood right through the pandemic and the cost-of-living crisis, as we all tried to get to grips with what on earth was happening and what it might mean.
As it turned out, the economy has weathered all this much better than would have been expected. The Government – wisely – set up a special committee in the early days of the pandemic to advise it on how to deal with the expected sharp rise in unemployment after it all ended. As it turned out, we are now at something like full employment with labour shortages in many areas.
And this economic resilience will, let’s hope, continue to be evident. The strong jobs market and the financially solid position of many households offers a reassuring backstop when looking at economic prospects
But there are signs now that consumer confidence has been hit and anecdotal evidence suggests that this is affecting spending patterns, as the hike in mortgage repayments adds to the wider cost-of-living crisis to put pressure on a wider group of households.
Reports suggest spontaneous spending is falling off, as squeezed disposable income forces more and more households to stick to the essentials. This is coming from those in the retail trade, hospitality and even parts of the building trade, where the extraordinary post-Covid blitz of home improvement may finally be slowing. The commercial property market has also stalled.
This feels more like a spending slowdown than anything more serious but, with consumers accounting for a large chunk of economic activity, it is important.
The latest Credit Union Consumer Sentiment Index, undertaken by Core Research, showed a slide in confidence in September to its lowest level in six months, with more households expecting their finances to deteriorate in the year ahead than anticipating an improvement.
As the cost-of-living crisis drags on, autumn spending pressures come into view, oil and petrol prices go back up and mortgage rises feed through, disposable income is being squeezed. Retail sales figures show how people are having to pay out more cash to buy the same volume of goods.
Economist Austin Hughes, who analyses the monthly survey, sees signs of what he terms a “financial stretch” among significant numbers of consumers and notes “a marked weakening in spending plans in September”, particularly on big-ticket purchases.
Clearly, less well-off people have been hit from the off in the cost-of-living crisis and will be waiting to see the extent to which last year’s budget supports are repeated. Younger renters with little disposable income or savings are among those most exposed.
Targeting temporary supports to help the genuinely squeezed members of the middle ground, without wasting a lot of money, is difficult. The political danger is of underwhelming an expectant public
Meanwhile, Hughes points to the varying impact on confidence of various age groups, providing an interesting insight into where the middle may be increasingly squeezed. The September data showed under-25s “notably less downbeat than any other grouping”, he said. Many will be still living at home and are benefiting from the strong jobs market.
In contrast, those aged from 45 to 55, what Hughes terms the “squeezed middle-aged” who typically have heavy costs in areas like mortgages, education and childcare were comparatively pessimistic, particularly in relation to jobs and household income.
Over-55s, meanwhile, who are more likely to have their mortgage paid off and have fewer family outgoings, are less negative – and are a lot more likely to be on the Rugby World Cup flights to France.
How consumer sentiment knocks on to actual spending can be variable, of course. They are generally related, but we know many households, often older and better-off ones, have significant assets and Covid savings to fall back on. These savings may be supporting the younger generation by helping with house deposits.
And, after the lockdowns, we have also seen heavy spending on home improvements and some big items like more expensive cars. But households may see much of the cash as a longer-term asset, rather than something to be splashed.
This nervous consumer mood is important both politically and economically as we head into the budget. Politically, the Government has to decide how much to support living standards via once-off measures in the budget. It is trying to pull back on last year’s amounts, arguing that inflation has eased. This is true but, for households, the actual level of prices remain high and for many incomes have not risen to match this.
Targeting temporary supports to help the genuinely squeezed members of the middle ground, without wasting a lot of money, is ifficult. With limited room for permanent tax and spending measures, the political danger is of underwhelming an expectant public.
Economically, a slowdown in consumer spending growth comes after recent export figures raised a few eyebrows, as sales overseas in areas like pharma and some other parts of tech fell off. Some of this is undoubtedly a readjustment after a Covid surge in pharma exports. And it is hard to interpret the data, as exports have been inflated by Irish subsidiaries of multinationals organising for goods to be manufactured elsewhere, but this activity still being counted in the Irish figures.
A more general growth slowdown would make whoever is in government a lot more concerned about seemingly endless overruns in the health service – which amount to more than the entire tax package planned for next year. It could also spell the end of a golden period for tax receipts. That would be an interesting backdrop indeed for the run in to the next general election, putting pressure on all sides to face up to the trade-offs which lie ahead.