Are you living a lemonade lifestyle on a champagne budget? Afraid to spend despite a resurgence in your household’s financial well-being?
Well, according to a new report published today by business group Ibec today, it seems that the Irish population is prosperous, propertied and flush; indeed our “net wealth position” has never been better. So why don’t we feel it?
Now, while the cynic among us might ponder whether the group, which represents employers, is trying to cut pressure for potential wage increases at the pass by asserting that we’re all rich again, the report does draw on economic statistics which clearly show that the recovery at macro level is finally trickling down into the pockets of households around the country.
The wonder then perhaps is why, in this new wonder economy, more of us aren’t feeling the glow of our new affluence.
Our disposable incomes are (almost) higher than they ever were
Having shrunk in the aftermath of the crash, Irish household incomes are back on an upwards trajectory once more. Figures cited in the report from the CSO’s Survey on Income and Living Conditions for 2016, show that households are benefiting once more from higher incomes, and are rapidly approaching Celtic Tiger highs - and this is on a post-tax basis.
Back in 2006, real disposable income stood at €19,211 - in 2016 it had recovered to €20,379, after falling back to €18,078 in 2013.
Real disposable incomes grew by more than 5 per cent in the first half of the year, which means that our incomes are growing at four times the European average. Disposable incomes in economic powerhouse Germany for example,
And given the (slight) improvements in Budget 2018 which kicked in last week, as well as the increase in the minimum wage from January 1st, taxpayers will do a bit better again in their pay cheques this month.
But our housing costs are soaring
This is where assumptions about our incomes can run aground. As Ibec states in the report, “By all measures housing is much less affordable now than in the mid-1990s with price-to expenditure ratios growing by between 80 per cent and 90 per cent nationally over the period”.
Yes, if you’re living mortgage free, or with an affordable mortgage, you will undoubtedly have benefited from the rapid recovery in house prices. Indeed a recent report from the Central Bank showed that the net worth of Irish households has risen by nearly 60 per cent since 2012.
However, as Ibec states in its report, for first time buyers buying a new house, new housing stock coming to market is “higher even than its peak in 2005”. And Irish homeowners continue to pay over the odds for the cost of their mortgage finance, which makes buying a home in Ireland even more expensive.
Moreover, despite the introduction of rent controls earlier this year, rents continue to reach record highs; in 2017 Irish rents grew at over six times the median of the other EU15 countries, Ibec notes.
It’s hard to feel wealthy if an ever increasing portion of your take home income is going on your home.
And we’re still heavily indebted
It wasn’t mentioned in the report, but one area Irish households remain firmly stuck to the naughty step is when it comes to household debt. Despite a situation whereby on a net basis, Irish households now have more savings than they have loans, we are still heavily indebted.
Yes, we’re paying down this debt quickly (it’s now 30% lower than the 2008 peak), but not quickly enough; Irish households remain the fourth most indebted across the European Union. According to ECB figures for the first quarter of 2017, the debt to income ratio of Irish households stood at 145.2 per cent - behind only Denmark, the Netherlands and Sweden. In contrast, better behaved French and German consumers have DTI ratios of less than 100 per cent.
Earnings growth is strongest in Ireland - but weak everywhere
Across the European Union, early figures suggest that Irish earnings grew the most on a “real” basis - ie accounting for inflation - during 2017. However, two things to note here. The first is that inflation remained almost negligible during 2017, peaking at just 0.9 per cent in April and even hitting negative territory during the summer. This means that inflation did not act as a drag on earnings growth helping to propel to the top of the European pack; but should you ask a typical household are their expenses rising, the answer will likely be yes. Food prices may have fallen, but energy prices are on the rise once more, as are other costs which eat into a family’s budget, such as insurance, school costs, and transport.
The second point to note is that it’s not that wages are growing rapidly everywhere, and we’re just the best. Across Europe wage growth is stagnating, with real growth of just 0.4 per cent across the Eurozone in the first half of 2017, while in some economies - such as the UK, Netherlands and Italy- wages are actually falling. Indeed in the UK, the crisis in earnings growth over the past ten years has been described as a “lost decade” by economic commentators.
The recovery is leaving a large cohort behind
If certain “haves” continue to have more, an increasing number of “have nots” are being left behind. According to the aforementioned CSO report, the numbers at risk of povertybarely declined in 2016, while Social Justice Ireland say that almost 800,000 people are living in poverty in Ireland - and about a quarter of a milion of these are children.
“Despite an increase in average incomes and other signs of economic recovery, these figures show that a significant proportion of the population is still living in very difficult circumstances. These figures are unacceptable in a rich, developed country like Ireland, ” Dr. Seán Healy, director of Social Justice Ireland, said on Monday.
We’re nearing full employment - but many jobs are precarious
According to Ibec, 2018 could be the year that we return to “full employment”, which typically indicates an unemployment rate of about 5 per cent. However, in this recovering economy, many of the jobs being created are unlike their full-time defined benefit predecessors. The advent of the gig economy, zero hour contracts and short-term contracts means that for many, the precariousness of their employment situation can impact on their financial confidence.
