Cliff Taylor: If the money is resting in your account, spend it

The arrival of Level 5 restrictions – meaning we can’t go out and shop or visit a restaurant,pub or cinema – brings a lot of economic pain for those losing their jobs. However it also means that one of the remarkable trends seen during the initial lockdown will accelerate again – money will be again flooding into savings accounts in unprecedented amounts. This cash – or cache if you prefer – could be one of the keys to help the economy bounce back. Getting people to spend it at home – and ideally in environmentally friendly ways – is a big policy challenge.

Figures produced by the European Commission this week estimated that Irish people would save almost 28 per cent of their disposable income this year, the highest among EU states and way above the average of just under 20 per cent. It is about twice the savings rate you would normally expect. Now being the best nest-eggers in Europe is not really something to shout about – while saving is usually seen as virtuous, the rate at which Irish people are putting away cash means money is not circulating as it should. People are saving because they have nowhere to spend.

There is always significant cash in savings accounts across the banking system. So how do we judge the “excess”, the bit that people might spend when they feel they can go out and about confidently again? Well, if we look at the second quarter of this year, Irish people salted away about €12 billion in savings accounts, €7.2 billion more than the same period last year.

With a high savings rate in the first quarter as well, excess savings in the first half of the year were probably in excess of €9 billion. Spending did bounce back in the third quarter – and the savings rate will have dropped off a bit – but this will have reversed again as the shops are shuttered for a second time. The pot will exceed €10 billion soon enough.

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Cautious public

The figures are all the more remarkable when you consider that for a substantial minority of the population savings accounts are emptying to pay the mortgage, the rent and other bills. This recession is different in that not only the majority of people’s incomes are unaffected, but also because the people who have been affected have been hit really hard. State supports have helped – and replaced a large proportion of income for the lower-paid. But many households are now really squeezed financially and worried about their prospects.

While the public debate is dominated by rows about when shops and restaurants will be allowed to reopen, the research shows the majority of the public is very cautious

Meanwhile others literally can’t find a way to spend what they have. Getting them to do so is not a straightforward task. While the public debate is dominated by rows about when shops and restaurants will be allowed to reopen, the research shows the majority of the public remains very cautious.

"The Government going to Level 5 was basically popular," according to Pete Lunn, the head of the Economic and Social Research Institute's behavioural research unit. He points out the ongoing tracking research by Amárach shows two-thirds of people said Government policy was appropriate following the move to Level 5, compared to just over one-third beforehand. Just 11 per cent felt the move to Level 5 was too extreme. And support for the move to Level 5 is strongest among the younger age groups – who are the ones most affected economically.

So tempting people back to anything like “normal” levels of spending involves more than allowing shops and restaurants to reopen. Some will go back on day one. But the majority are cautious and need to be comfortable that whatever they are doing is safe – and seeing what is happening across the EU will not reassure people. Part of what the Government must do as we come out of this lockdown is to communicate a credible plan to keep the virus suppressed and evidence-based decisions and advice on what can reopen and how our behaviours need to continue to adapt to keep us safe.

Adapted spending

It may not be easy, but we have to try to find a way forward which does not involve just opening and closing large parts of the economy. This may involve some activities not resuming – clubs, large gatherings at matches and so on. And there are real questions still about when a vaccine might be available and how our spending patterns may change in the long term. For example, will we be queueing at the departure gate in the airport or remain nervous of travelling?

There are questions about when a vaccine might be available and how our spending patterns may change in the long term

The trick in helping many of those who have lost their jobs and incomes will to be get those with bulging bank accounts to feel safe to spend. Lunn points out that this is likely to involve adaptation, as well as just waiting to feel safe to, say, go to the cinema. So consumption patterns over Christmas will be worth watching to see how people are adapting to spending online, as well as what they may do when the shops reopen. Some business sources even wonder whether the logistical framework for dispatch and delivery will hold up under the strain.

Trying to judge how Ireland has done versus other EU countries economically through the crisis is shot through with difficulty because our economic data is so messed up. On a fair assessment, you would say that our domestic economy was hard hit, as reflected in jobs and consumer spending, though many other countries were also severely affected, notably Spain and Italy. And also that the multinational-dominated exporting part of the Irish economy has held up well, increasing overseas sales and supporting well-paid jobs and taxes.

The flipside of having had relatively severe restrictions here is that we have particularly high savings. For 2021, we need to see consumers spending again – and businesses investing. If the money is resting in your account, go out and spend some of it when you can.