One of the interesting things to note about Ireland’s pandemic experience is that while the “consumption shock” – the collapse in household spending on basic goods and services – was sharp and in line with other countries, the jump in savings was something of a statistical outlier.
The increase in the savings ratio here – the percentage of household income that is saved – was the largest in Europe. So while consumption expenditure fell by 9 per cent in 2020, an inevitable consequence of lockdown, Irish households placed an additional €14.2 billion on deposit.
The Government’s extensive income supports, which have shielded many households from the worst of the downturn, is perhaps the most cogent explanation for this.
The two-tier nature of the Irish economy, which has left many households unaffected in earnings terms and those on lower incomes bearing the brunt, is also part of it.
It’s the exact opposite of how we experienced the financial crash. When incomes crashed in 2009 and 2010, we initiated a brutal austerity programme, essentially applying further downward pressure on incomes. The Economic and Social Research Institute (ESRI) – in its latest economic commentary – noted that “the unwinding of these excess savings” will play a crucial role in recovery and the future path of the economy.
Expectations
“If households run down excess savings balances when their consumption possibilities are widened, this could provide a natural demand stimulus without policy intervention,” the think tank said in its report.
Much will come down to confidence – in other words people’s expectations of where things are going.
“The degree of consumer confidence is likely to play a role in unwinding these savings balances,” the ESRI’s Conor O’Toole says.
“For example, if households expect the risks around Covid-19 to be lowering through the rollout of the vaccination programme towards the end of this year, this is likely to provide them with more security to increase spending and hold less savings as a precaution,” he says.
The converse is also true – confidence is likely to diminish if there are further delays in the vaccine rollout and/or further spikes in infections and case numbers.
It’s likely to evaporate if a fourth wave – centred on vaccine-resistant variants or strains – hits. Nobody really wants to contemplate this, but it’s a possibility.
Sharp rebound
Despite the uncertain outlook, the ESRI is pretty confident that the economy here will experience a sharp rebound in the second half of 2021 on the back of a pick-up in consumption and investment, assuming the vaccination programme facilitates the relaxation of public health restrictions.
It expects the current lockdown to continue to June and even a little bit beyond, which makes it growth predictions – 4.4 per cent this year, 5.2 per cent next year – look somewhat optimistic, albeit these are GDP forecasts, which don’t necessarily reflect the real feel in the Irish economy.
Related to this is the fact that recovery in the labour market is expected to lag recovery in headline growth. The ESRI says unemployment – now at 25 per cent – won’t return to pre-pandemic levels until late 2023 and will be as high as 10 per cent even at the end of this year. This is perhaps the bleakest element of its latest analysis.
