Consumer Confidence Improves but Disposable Incomes Still under Pressure
Increase in property sales fuelling growth of building materials
Data from the Monitor shows that while consumer confidence has improved significantly, (up 5 points in the first half of 2013 compared to the same period of last year), disposable incomes are showing renewed pressure as a result of new household and property taxes, putting further downward pressure on consumer spending. The report also highlights evidence of greater activity in the property sector, with an increase in the number of transactions (up 13% on last year), and in the sale of building materials (up 6% on last year), both of which should boost activity in the consumer economy.
Mary Lambkin, Professor of Marketing, UCD Smurfit School, and one of the authors of the Monitor, said “Despite a slight drop in consumer confidence the first quarter of the year, due mainly to concerns about the impact of new household taxes and pay cuts on household finances, consumer confidence has improved significantly in Q2 2013, giving reason for optimism about future spending. Consumer confidence in the UK and wider EU also picked up slightly in recent months as fears about the stability of the Eurozone receded. Not surprisingly consumers are taking a cautious approach, continuing to pay down debt rather than spending.”
A recent household budget survey provided evidence of the financial strain that has inhibited consumer spending. Overall, 82% of households claimed to have reduced their spending on at least one category of expenditure as a result of the economic downturn. Nearly a quarter of all households indicated that they had cut back on five or more categories of spending. Over 40% of households indicated that they had experienced difficulties in keeping up with their bills and debts¹.
The Consumer Market Monitor relies on a model of consumer behaviour which sees economic variables such as income levels, taxes, interest rates and exchange rates influencing consumer confidence which, in turn, influences consumer behaviour including spending, saving and borrowing. Consumer spending is affected by the combined influences of how much money people have available to spend—their disposable income, coupled with their confidence in spending it. Consumer spending accounts for over 60% of GNP in Ireland and is therefore a critical factor in driving any recovery in the economy.
Key findings from CMM Q2 2013 include:
- Consumer Confidence has improved significantly this year, up 5 points in the first half of 2013 compared to the same period of last year.
- Disposable Incomes down -3.7% compared to the first quarter last year. It seems likely that the public sector pay cuts and property taxes which took effect recently will put further downward pressure on disposable income in the near term.
- Consumer spending down by -3%, year-on-year, a greater rate of decline than expected. Some recovery is expected for the remainder of this year due to a gradual improvement in labour market conditions and a pickup in consumer confidence, but it is still forecast that consumer spending will decline by -0.5% for 2013 as a whole.
- Household Lending Continues to fall: Loans for house purchases account for over 70% of lending to households. While house loans increased by 8% between November and December 2012 to avail of mortgage interest relief before it ended, household lending continues to fall in 2013, down -2% in the first half of 2013.
- Credit Card Debt Declines: Credit card debt also continues to decline, down -9% in Q2 2013, year on year. The average credit card debt in Ireland is now €1,275. Despite the rapid reduction in credit, Irish households remain among the most indebted in Europe, with debt averaging 201% of gross disposable income. This compares with 157% in the UK and 123% in the US.
- Number of property transactions increases: There were over 4,600 home purchase transactions in the first three months of 2013, compared to 4,100 in the same period a year earlier, an increase of 13%. Only 1,698 mortgages were issued during that period, however, which suggests that more than half of these purchases were for cash.
- New Car Sales Struggle but Second hand cars increase: There were 49,503 new cars sold in the first six months of 2013, down -16% from 2012. Record sales of 11,621 cars were achieved in July, with the commencement of the new registration system, but the total is still – 8% behind last year. In contrast, sales of second-hand cars have been strong so far in 2013, increasing 23%, from 19,224 to 23,693, in the first half.
- Retail Spending Bottoms Out: Spending was virtually flat for the first quarter of 2013 year-on-year, and increased by just 0.4% in Q2, year-on-year, suggesting, at best, that the market has bottomed out and may finally be stabilising. Conditions are still very challenging for many retailers, but retail sales may be stabilising after four years of decline.
Tom Trainor, Chief Executive, The Marketing Institute, said “Conditions in Ireland over the past five years have seen the amount of discretionary income decline steadily due to a combination of rising unemployment, reductions in pay and increases in taxes and other essential costs. Not surprisingly, this has seriously damaged confidence and consumers have responded by taking a cautious approach, increasing their savings and reducing their debts. On the plus side, employment seems to be picking up slightly in the private sector and there is some evidence of increased activity in the property sector, both of which should boost activity in the consumer economy.”
About the author
The Consumer Market Monitor is a service provided by The Marketing Institute of Ireland in collaboration with the UCD Smurfit Graduate Business School.