SAVINGS BY households more than tripled in 2009 compared to 2008, according to figures released by the Central Statistics Office (CSO) yesterday.

Households were saving almost one-eighth of their total disposable income last year. The net savings rate of 12.3 per cent represented a massive increase on 2008, when just 3.9 per cent of disposable income was saved. In 2007, the figure was zero.

In money terms, net household savings exceeded €11 billion last year – by far the highest level recorded since such figures were first compiled in 2002. The previous high was recorded in 2004, when net savings reached just over €4 billion. The very sharp increase in the savings ratio in 2009 was mostly accounted for by a jump in savings, but a decline in disposable incomes was also a factor. Net disposable income of households fell from its all time peak of € 91.7 billion in 2008 to € 89.6 billion in 2009. It did, however, remain above the 2007 level of € 87 billion.

Much of the decline in incomes as a result of job losses and depressed earnings was offset by higher social welfare benefit payments. The new figures show social transfers increased by almost €2 billion in 2009 on a year earlier, to reach €26.4 billion.

Separate figures from Eurostat, the EU’s statistical agency, put the very large increase in Irish household savings into comparative perspective.

As the chart illustrates, the gross savings rate (the CSO figures net out the effect of depreciation of capital goods) in Ireland surged past the European average in 2009. This followed an extended period in which it was lower than the EU and euro area averages. At its low point in 2007, Ireland’s gross household savings rate was the lowest of any euro zone state for which figures are available. The much higher savings ratio has resulted in a dramatic fall in household consumption. The CSO noted household spending on consumption fell by €10 billion in 2009 compared to the previous year.

These figures could be interpreted to support a view that much of the saving taking place in the economy is “precautionary”. Levels of precautionary savings are usually closely (negatively) correlated with levels of confidence about future economic conditions.

This would suggest that if consumers became more confident, a large increase in spending could result, accelerating the rate of economic growth. However, another motive – the need to repair balance sheets – is also pushing up savings rates.

Eurostat figures show households’ debt stood at 197 per cent of their disposable income in 2008 (the latest available data). This was up from 108 per cent in 2002, the first year for which the figures are available. The same ratio in the euro area as a whole was less than half that of Ireland’s in 2008, at just 95 per cent.

With very high debt levels on the liability side of household balance sheets and the asset side negatively affected by property and share prices far from their peaks, Irish households have experienced very large declines in net wealth.

Historically, savings typically rise in such circumstances as households seek to pay down debt to improve balance sheet positions.