Tills at standstill as consumers take cover

ECONOMICS: FOLLOWING A year of buoyant spending, it would appear that the Irish consumer has essentially gone on strike in 2008…

ECONOMICS:FOLLOWING A year of buoyant spending, it would appear that the Irish consumer has essentially gone on strike in 2008. Against a backdrop of rising unemployment and subdued confidence, consumers will increasingly opt to save rather than spend - bad news for the retail sector and Irish economy in general in 2009.

Consumer spending is a crucial determinant of economic growth, given that it makes up almost 60 per cent of total Gross National Product. It is made up of two types of spending - spending on services and spending on goods, each of which account for roughly half of the total.

While services spending has held up reasonably well so far in 2008, boosted for the most part by sales of foreign holidays, spending on goods, as evidenced in the monthly retail sales figures from the Central Statistics Office (CSO), has fallen off sharply.

According to the latest figures for September, total retail sales are down over 6 per cent on 2007 levels in volume, or price-adjusted, terms.

READ MORE

While all sectors have been exposed to falling sales volumes, some have been worse hit than others. This is particularly true of motor sales, which account for a third of the total decline so far. In the year to September, there has been a fall of almost 30 per cent in the number of cars sold. Although there is anecdotal evidence to suggest the heavy discounting of used cars, to date there have been few signs of falling prices for new cars. As the pressure on the motor industry mounts into 2009, efforts to stimulate consumer demand will likely be stepped up.

Other categories of retailers, in particular those linked to housing, are also feeling the pinch. Sales of household goods, such as furniture, electrical and hardware products, are down almost 15 per cent in the year to September. This is a direct consequence of the weakness of the domestic housing market, which has seen house completions declining from 78,027 last year, to an estimated 48,000 in 2008. Given the further fall in completions forecast for 2009, the outlook for sales of housing-related goods remains poor.

Other areas of discretionary spending, such as sales in bars and sales of clothing and footwear, are also suffering while some areas of non-discretionary spending have also been faltering. Sales of food are down almost 3 per cent on last year, somewhat surprising given that food represents a staple item in the household budget, and also given the price wars underway in Irish supermarkets.

While it may appear the price reductions are not having the desired effect, sales may well have fallen by more in the absence of such special offers. In addition, the cutbacks are probably more pronounced in the luxury food area, a likely response at a time of more cautious spending.

No single factor explains this reining in of consumer spending across a broad array of retail sectors. The decline was prompted by rising energy and food prices, the sharp slowdown in domestic and international economies, and low consumer confidence. While the last factors remain prevalent, inflation is now falling and is set to turn negative in 2009 as mortgage interest rates and energy and food prices fall further.

Under normal circumstances, this would provide a welcome boost to consumer spending.

However, the negative effect of the deteriorating labour market will more than offset the benefits of falling inflation, resulting in heightened consumer caution and saving, and a further slowdown in consumer spending. For this reason, the outlook for retail sales and consumer spending is even worse in 2009.

Of some comfort, perhaps, is that Ireland is not alone in experiencing a consumer-related slowdown. In the United States, retail sales tumbled by a record 2.8 per cent in October - the steepest monthly decline since the series began in 1992. While the decline in euro zone retail sales was slightly less than expected in September, they have fallen by 1.6 per cent over the past year.

British retail sales have been surprisingly resilient so far, but it is only a matter of time before the official data there reflect the continued weak reports from retailers.

Ireland, in common with these other regions, appears to be experiencing a negative feedback loop - bad news on the economy is driving consumer spending lower which, in turn, is subtracting from economic growth, a further factor driving interest rates lower in coming months.

When can a return to more normal levels of consumer spending be expected? The outlook is subject to greater uncertainty than usual. At this stage, we are pencilling in modest growth of half a percent in consumer spending in 2010.

Taken together with an improved investment and export performance, this should see Irish growth turning positive again in 2010, albeit at a more modest pace than we have become accustomed to in recent years.

Lynsey Clemenger is an economist at Ulster Bank