Irish consumers not as prudent as originally suspected


#1

from Goodbody’s morning research note


#2

2001 to 2005, Hmmm I wonder why savings rates increased between those specific years …

And you don’t think the SSIA phenomenon was also responsible for an increase in savings?

Eh, have you factored in the effects of inflation and increased mortgage payments on disposable income (DI) on that? It’s DI where the savings come from.

How can professional economists ignore such an obvious anomaly in the system and carry on as though the statistics they are looking at are normal! Irish saving rates are not as high as were claimed, the Irish consumer is in a very, very, very precarious situation with minimal cash savings, devaluation of their main asset (their house), significant debts by any measure and a slowing economy.

Do we need to pour the scalding hot coffee on some of these guys before they smell it!

Blue Horseshoe


#3

Does anyone else get the feeling that these savings rate statistics are hiding something?

Perhaps that 80% of the saving is being done by 20% of the population?

With the other 80% saving feck all.


#4

When in doubt the old 80/20 20/80 rule!
I’d say you are onto something alright.


#5

Yep, but I’m happy to dip into the account and help anyone out.


#6

In other news

“Irish houses not worth as much as originally suspected”


#7

it works 80% of the time :wink:


#8

Just a word of caution. These are *gross *savings ratios. Current income less current expendiiture. Remember that the problem with the Irish economy has been a very large negative *net *savings ratio - Household were spending massive amounts on capital items (dem luvly houses).

What you have been witnessing over the last number of years has been Irish households asking foreigners (remember McFoppy’s book) to give them a quite massive advance on their future income, which they promptly spent on houses. The capital sums they spend end up going into households current income - e.g. earnings and profits in the construction industry that then appear like savings (on a gross basis).

I think I have posted on this before, but it means that the savings data held up as some great “fundemental” is simply an artifact of the way we account for flows of money.

Think of it this way. You buy a new house, for 100% of your annual income. This expenditure doesn’t reduce the gross savings ratio because it is a capital expenditure.

But you do pay the money to the builder, which then represents income to him and all his employees, contractors, suppliers etc. It increases current incomes and hence pushes the gross savings ratio up.

It appears like this group of people have become more prudent in aggregate (the savings ratio has gone up in aggregate), but that is only an illusion, because it doesn’t account for future income you spent (which is 100% of annual income) for the capital item that you will be consuming over the future.

Now, there is nothing wrong with this. That is the way it should be accounted for. But, you do need to be very careful when you try and interpret what this data shows and implies.

For a more true appraisal of “prudence” and potential financial duress you should always look to the net savings figures. The reason is because there is no guarrantee that the income that was anitciapted over the future will occur, nor is there any guarrantee that the capital assets being bought have not been massively overpriced :wink: (meaning in technical terms, they won’t be providing the income stream in the future that was expected - like a situation where you agree a price to pay and then you throw in €100k to the builder/developer just for the heck of it).

It has been know for a good while that the net savings ratio (the one we should be watching in the context of a potential credit bubble) was very high and very negative. People were building a debt mountain - quelle suprise - while giving an appearance that current incomes were extremely buoyant and more than enough to justify the high levels of current expenditure (consumption).

So, I would be more impressed with a report that spelt out exactly why this fascination with Irelands’ high gross savings ratio over the recent past was and still is a big problem.


#9

Where does one find this number?


#10

What you need is something called Household financial balance, or somesuch. I am not as familiar with Irish statistical publications as the I am with UK ones In the UK they identify household accounts right through to this net savings.

But, if you go to table 11 here you can impute the value:

cso.ie/releasespublications/ … e_2006.pdf

If you see for 2005 it shows a gross savings figure of €6,900m for households. That is the source of the positive savings ratio 6,900/83,000 = 8.3% prior to the revision to 6.9% noted in the OP (you get the 83,000 by going to table 9 and subtracting iline 127 from line 125 to obtain disposable income.

For a net figure you need an estimate for household capital expenditure. There are some other items, but that will get you close enough for these purposes. Line 151 in table 11 gives a market value for capital formation in building and construction. How much of that was paid for by households? I can’t find the figure offhand, but lets say 50%, the remainder being commercial, infrastructure etc. I think I am being generous, but someone else can provide more exact figures if they have them.

So gross savings of €6,924 less capex of €16088 (50% of 32,176) is -€9,164. This is a around 11% of current disposable incomes.

Is this large? Well, you would need to increase incomes by 11% per annum just to keep your debt position on a stable growth path.


#11

:open_mouth:


#12

here is my take on what happened

savings figures and estimates of such were fudged for a few years by govt to allow bankers giving 100% mortgages to point to the “high savings ratio” by prudent Irish folks, “best in the world after the japan and germany”.

My guess is that the fudge has got too big to hide so we have had the revisions. The fudge got too big because it could not stand up to international scrutiny - probably asking searching questions of those in charge of this.

it has been revealed now because foreign investors have left town anyway so “lets tidy this up lads and get it out there quick”, bury the bad news amonst the other bad news in the middle of summer when everyone is on holidays.


#13

That is some mighty conspiracy you describe.

I don’t think that was the case. This is very typical. Household savings in the national accounts is the residual you get when you subtract estimates for consumption from estimates for income - two large number. Small revisions in those result in seemingly large revisions to estimates of savings.


#14

Very fundamental stuff. Saying that consumers will have double their current savings rate of 4.5% to get back to the long term average of 9%. That has huge implications for the banking and retail industry.

Whoever was doing this should have erred on the other side in a booming economy or at least say that Irish people are saving somewhere between 2% and 9%.

Someone doing a PHD and getting deep in the numbers probably rumbled the rosy assumptions and forced the climbdown that was then quietly pushed into the public domain in the middle of summer.

The sheeple in this country are fast realising that the numbers they get fed from the govt have alot of makeup and dye put on them before they see the light of day.