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The consumer economy is now recovering rapidly
CMM Report | Consumer Market Monitor | UCD Smurfit School | 05 August 2015
Economic recovery is building rapidly in Ireland, with consumer spending now making a significant contribution to economic growth, for the first time since the start of the recession in 2008; one of the key findings of the latest Consumer Market Monitor (CMM), published today by the Marketing Institute and UCD Michael Smurfit Graduate Business School.
Retail sales were up 3.7% for 2014 and by 5.7% for the first half of 2015, in real terms. Services were up 4.1% for 2014, and up 9.3% for the first quarter of 2015. 40,000 houses sold in 2014, up 38%, and 21,300 in the first half of 2015, up 47%.
A number of things are contributing to this positive trend – most notably regular increases in employment. There were 93,000 jobs added from the low point in 2012 to the first quarter of this year, a 5% increase in the total number of people employed.
Mary Lambkin, Professor of Marketing, UCD Smurfit School, and one of the authors of the Monitor, said “Consumer spending accounts for over 60% of GNP in Ireland and is a critical factor in driving recovery in the economy.”
Consumer confidence has boasted a positive trend from 2013, reaching a record level in Q4 2014, and this has been feeding through into consumer spending. Sales of new cars experienced a major turnaround in 2014, with 92,361 units sold, a 30% increase on 2013. This buoyancy is continuing this year, with 78,660 new private cars licensed in the first half of the year, an increase of 26% year-on-year.
Lambkin continues “Disposable incomes are at last beginning to show modest growth as a result of jobs growth and this, coupled with greater availability of credit, is leading to accelerated spending on many categories of goods and services.”
Retail sales are also improving; sales volume rose by 3.7% in 2014 while value increased by 1.6% indicating a significant upturn in activity. This upward trend has continued into 2015, with sales volume up by 6.6% in Q2, year-on-year, following 4.8% in Q1. Value was up 3.4%, also an improvement of the increase of 1% in Q1.
Commenting on the findings Tom Trainor, Chief Executive, of The Marketing Institute, explains “We have been waiting for economic recovery for a long time in Ireland and especially in the consumer economy which has been particularly badly damaged in the recession. It is very heartening to see definite evidence that this sector is now recovering and this positive momentum will help to strengthen many businesses and allow them to grow and expand employment.”
Sales of household goods were particularly strong, with electrical goods up 9.5% in volume in Q2, hardware, paints and glass up 6.2%, and furniture and lighting up 5.9%; reflecting the increasing number of property transactions. Sales of services have also been strengthening, up 4.1% for the year 2014, and up by a further 9.3% for the first quarter of 2015, year-on-year.
There is also to some regional variation in the rate of recovery, with the greater Dublin area recovering more quickly than the rest of the country. The other regions are catching up, however, with the recovery gradually spreading to all areas.
Consumer Incomes and Spending
Household disposable income rose by 3% in 2013 – the first increase since 2008. Disposable income rose by a further 3% in 2014 and is forecast to increase again this year and next, in response to continuing improvements in employment numbers, and other factors such as falling oil prices and possible tax reductions.
Household spending closely mirrors income, and recorded growth in 2014 for the first time since 2008. Personal consumption expenditure was up 2% for the year. Personal consumer spending is growing at an increasing rate this year, up 3.8% in the first quarter, and this is likely to be closely matched by household spending. Spending on services was also up by 4.1% for the year 2014, and by an even higher 9.1% for the first quarter of 2015.
Personal consumer spending last year was still € 10 billion less than at the peak year of 2007. However, consumer expenditure is expected to continue to grow due to improving labour market conditions and stronger consumer confidence. The Central Bank is predicting an increase of 2.3% in personal spending for 2015 as a whole, and a similar growth of 2.3% for 2016. Other forecasters are more optimistic, however, forecasting growth in consumer spending of closer to 3% for this year and onwards.
Borrowing by Irish consumers grew at a record level from 2000 onwards and peaked in March 2008 at €150 billion, but has declined steadily since then, down -37% from 2008 to €93 billion in Q2 2015.
Total lending to Irish households continued to fall in 2014, decreasing by -8.2% for the year to the end of Q4 2014, as households tried to get their borrowing down. Loans outstanding to Irish households decreased by -3.2%.
Loans for house purchase, which account for 82% of household loans, peaked in May 2008 at €127 billion. Since then, we have seen a continued decrease to €77 Billion in June 2015, a cumulative decline of -39%.
Lending for other consumption accounts for approximately 18% of total borrowing. This category peaked in Q1 2008 at €30 billion but declined to €19 billion by year-end 2014, a reduction of -38%. This category continued to decrease through the first half of 2015, standing at €16 billion in June 2015.
The rate at which Irish households have reduced their debt is quite remarkable, surpassing most other countries, except for the US. Household debt as a percentage of income has decreased 33 percentage points in Ireland and 26 points in the US from 2007 to 2014. However, household debt levels in Ireland remain relatively high by international standards, at 177% of disposable income, and remains a constraint on recovery in the consumer economy.
Following four years of decline, retail sales stabilised in 2012 and increased very slightly in 2013, up by 0.8% in volume terms. This represented a turning point in the economic cycle, with sales growth continuing to accelerate in 2014. Retail sales volume (excluding motor vehicles) rose by 3.7% in 2014, while value increased by 1.6%.
This upward trend has continued into 2015, with sales volume up by 4.8% in Q1, year-on-year, and 6.6% in Q2, an average of 5.5% for the first half of the year. Value was up 3.4%, also an improvement of the increase of 1% in Q1.
Sales of household goods were particularly strong in Q2, with electrical goods up 9.5%in volume, hardware, paints and glass up 6.2%, and furniture and lighting up 5.9%. All other retail categories also got a boost in recent quarters, and the evidence suggests that 2015 is delivering sales growth for most retailers.
Sales of new cars experienced a major turnaround in 2014, with 92,361 units sold in the full year, a 30% increase on the previous year. This buoyancy is continuing this year, with 78,660 new private cars licensed in the first half of 2015, a rise of 26% compared with the 62,280 sold in the first half of last year. Industry expectations are that new car sales could reach 120,000 by the end of 2015, a 25% increase for the year. Sales of second hand cars are also doing well, up 20% on 2014.
Retail sales excluding the motor trade are also improving; sales volume rose by 3.7% in 2014 while value increased by 1.6% indicating a significant upturn in activity. Retail sales have continued this upward trend in the first half of 2015, with volume up by 6.6% in Q2, year-on-year, and value up 3.4%.
All product categories experienced growth in Q2 2015, with clothing and footwear up the most at 10.3%, followed by household equipment at 8.3%, year-on-year. More remarkable, however, is the significant growth displayed by sectors that have been particularly weak throughout the recession, such as bars and newsagents. In summary:
Overall, we can conclude that retail sales are back on a strong growth path, accelerating from Q1 to Q2 of this year. This positive momentum augurs well for continuing growth through the rest of 2015 and into future years, reflecting the broad-based strengthening of the economic fundamentals in the Irish consumer market.
Download the full report CMM Q2 2015
View an online version of the report here
The Consumer Market Monitor is an expert report, released quarterly and designed to track key indicators of confidence and activity in the Irish consumer market. The 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. Data is collected from sources including the Central Statistics Office (CSO), the Central Bank, the European Commission, and various other secondary sources. It is a service provided by the Marketing Institute of Ireland in collaboration with the UCD Smurfit Graduate Business School.