Economics: Personal savings appear to be rising and employment growth is keeping the housing market buoyant
The recent publication of Irish employment data throws some light on an otherwise puzzling development in the housing market, but raises other questions, notably in relation to consumer spending. The latter has picked up sharply in 2005, but the surge in job creation recorded by the latest figures implies that spending in the high street is seriously lagging behind the growth of household income. Popular imagination has it that Irish consumers live beyond their means, buoyed by credit cards in an ocean of debt, but the reality is that personal savings appear to be rising and people are not spending recklessly, at least in the aggregate.
Annual employment growth in the economy picked up momentum in 2004, a pattern maintained in the first quarter of this year, with 72,000 new jobs created. Most, if not all, forecasters had envisaged some deceleration in the pace of job gains, so the second quarter figure came as a real surprise - employment rose by 93,000, equivalent to a 5.1 per cent increase in the total numbers at work. This percentage gain is similar to that achieved in the best years of the Celtic Tiger period and is in some ways more impressive, in that the 1990s included a sustained rise in manufacturing jobs, whereas the 2005 figure saw job losses in that sector.
On that point, it is puzzling to observe the media obsession with manufacturing, reporting job losses on even the smallest scale in an economy with almost two million in employment. Similarly, the column inches devoted to IDA sponsored jobs are disproportionate to their importance, as most people work in the service sector in jobs created by unsubsidised private capital.
The second-quarter jobs surge brought the rise in employment in the first half of the year to 4.5 per cent, implying a double-digit gain in household incomes on the not unreasonable assumption that wages rose by around 5.5 per cent.
Disposable income in the aggregate is also boosted by transfers, rents received and dividends and reduced by direct taxation, but trends in those variables are unlikely to alter the conclusion that Irish household incomes rose by over 10 per cent in the first half of 2005. Moreover, inflation in this period was low, averaging 2.2 per cent, so incomes probably rose by about 8 per cent.
On that basis, it is easy to explain the strength of mortgage lending in the first half of 2005. Household income growth is the key determinant of housing demand and we now know that income growth was much stronger than previously thought.
The pace of employment growth also helps to explain why house prices have not buckled in the face of supply in excess of what is generally believed to be underlying demand.
We know that the supply of housing has been at elevated levels for some time now, with all the indicators pointing to supply this year only marginally short of last year's record 77,000 total, which should have put downward pressure on property values. Yet house prices are still rising, albeit at a diminished pace, and this now appears more explainable given the scale of job creation and the accompanying upturn in immigration, which reached 70,000 in the year to April 2005, well above levels assumed in any forecast of Irish housing needs.
This still leaves one puzzle though - why did retail spending rise by only 5 per cent in real terms in the first half of 2005 against household income growth of around 8 per cent? The SSIAs provide a partial explanation as over €2 billion a year is now flowing into these accounts, and no doubt some of this would normally be spent in the absence of such a generous transfer from the taxpayer. Workers' remittances may also be a factor - migrant workers are no doubt sending money home. Yet this is unlikely to be on a sufficient scale to impact aggregate figures, particularly as some migrants may be in the black economy, so their employment and incomes are not recorded anyway.
Irish residents are also travelling abroad in record numbers and expenditure outside the State is rising faster than expenditure on the domestic high street. Spending by Irish visitors abroad rose by 9.5 per cent in the first half of 2005. This is added to retail spending when calculating total consumer spending for national accounts purposes, so the latter may well emerge stronger than the retail figures imply.
Nevertheless, there is still a gap between spending and income, which is odd in such a buoyant labour market. Perhaps it is just a question of time - consumers will eventually get round to spending all of this higher income, and the second half of 2005 may see even stronger retail sales.
Dr Dan McLaughlin is chief economist, Bank of Ireland
