14/1/2013: Irish Savings Rates - Q3 2012

Data for Irish Savings rates for Q3 2012 has been released by the CSO (see release here). Instead of rephrasing the release, lets take a look at the underlying data (link to data is provided on page 1 of the release).

First off: household savings and consumption expenditures, seasonally-adjusted:

Per chart above (all in current market prices, so no inflation adjustment, but seasonally-adjusted)

• Disposable income rose in Q3 2012 to EUR23,002 million - up EUR486mln (+2.16%) q/q after expanding EUR385mln (+1.74%) in Q2 2012. This is good news. Year-on-year, income is up EUR1,158mln (+5.30%) and this follows up on EUR823mln increase y/y in Q2 2012 (+3.79%).
• Historical comparatives for total disposable income are also looking good. Average income since Q1 2008 was EUR22,984mln, so we are close to that in the latest figures. We are also ahead 2010 average (EUR22,198mln), 2011 average (EUR21,693mln), but below 2008 average (EUR25,061mln) and 2009 average (EUR23,310mln).
• Final consumption expenditure in Q3 2012 stood at EUR19,319mln up EUR64mln (+0.33%) q/q partially reversing decline of -EUR77mln (-0.40%) q/q in Q2 2012. Year-on-year, consumption spending was up EUR217mln in Q3 2012 (+1.14%) after posting a y/y decline of -EUR165mln (-0.85%) in Q2 2012.
• In longer range averages terms, latest consumption reading is just about at the average level for 2012 (EUR19,302mln), slightly below 2011 average of EUR19,362, and below 2008 average (EUR22,264mln), 2009 average (EUR19,836mln) and 2010 average (EUR19,532mln).
• Gross household savings stood at EUR3,684mln in Q3 2012, up EUR423mln (+12.97%) q/q and this follows EUR463mln rise (+16.55%) in Q2 2012. Year-on-year, household savings rose EUR942mln (+34.35%) in Q3 2012 after posting a EUR988mln (+43.47%) y/y rise in Q2 2012/
• So far, Q1-Q3 2012 average savings run at EUR3,248mln - ahead of all annual averages, save for 2009 when they reached EUR3,475mln.

Saving ratios:

• As the result of the above, the household savings ratio (ratio of gross savings to total disposable income) rose from 14.48% in Q2 2012 to 16.02% in Q3 2012. This represents an increase of 1.53ppt q/q (following a 1.84% rise q/q in Q2) and a y/y rise of 3.46ppt (down from the y/y rise of 4.00% in Q2 2012).
• Longer-term comparatives suggest the return of strong precautionary savings motive (as shown in the chart below). More specifically, adjusting for growth variation in Irish GDP, longer-term savings ratio consistent with economic recovery for Ireland should be in the range of 8.6-11.9%. We are now well above that range. More significantly, even taking shorter period deleveraging pressures in 2008-present crisis, the savings ratio averages at around 14.10%, lower than the current 16.02%. 2012 average savings ratio through Q3 is 14.38% against 2008-2011 average of 11.9%. By all metrics, Q3 2012 looks like a return of the precautionary savings motive for households.

However attractive it might appear to make an argument that savings ratio is too high amongst Irish households, one must consider the fact that our households are:

1. Under immense pressures to deleverage out of extremely high debt ratios (an objective consistent with banks stabilisation objective of the Government and with Troika concerns about debt levels, as well as with the goal of restarting household investment cycle)
2. Household savings = banks deposits and I doubt there is out there a single Irish politician brave enough to suggest we need less of the latter
3. Current act as the main driver for supporting gross national savings from complete and total collapse. Do recall that national savings = national (domestic) investment (ex-FDI). And do recall that in Ireland, SMEs are funded by domestic savings (at least equity, non-debt funding component). Which means that were we to have meaningful investment activity here, we need to encourage and support, not discourage and tax, savings.

On this note, let's take a look at seasonally unadjusted data for aggregate savings in the economy:

The chart above shows clearly that:

• Total savings in the economy declined to EUR7,320mln in Q3 2012 (down EUR559mln or 7.09%) q/q, but rose EUR1,747mln (+31.35%) y/y. In Q2 2012 there was an annual rise of 28.71% or +EUR2,199mln.
• Excluding financial corporations, the real economy's savings fell EUR452mln (-8.05%) q/q in Q3 2012, but a re currently up EUR1,851mln (+55.84%) y/y, against Q2 2012 annual rise of EUR910mln (+19.3%).
• The chart above shows that once we exclude financial corporations, savings actually are running much closer to long-term trend and that the trend is moving up, toward rising savings once again. This upward trend was established around Q1-Q2 2011 and as we shall see shortly is not necessarily signalling a major departure from the long-term established trends (se chart below).

The decomposition of savings into sectors shows that:

• Household savings rose modestly q/q in Q3 2012 (absent seasonal adjustment) and are up significantly y/y (+26.6% in Q3 2012), although that rise was well-matched by 26.0% increase in Q2 2012.
• General Government continued to dis-save (accumulate debt) in Q3 2012, shrinking national savings by EUR2,331mln (more than 9 times the rate of dissaving, as the rate of saving in the households). Year on year, the Government has managed to post EUR423 increase in dissaving (+17.2%).
• Financial Corporations also showed dis-saving in Q3 2012 or EUR107mln compared to Q2 2012 and EUR104mln (4.6%) compared to Q3 2011.
• Non-Financial Corporations posted savings of EUR4,930mln in Q3 2012, up EUR1,606mln (+48.3%) on Q2 2012 and up EUR1,215mln (+32.7%) on Q3 2011. 
• Thus, savings increase in Non-Financial Corporations outpaced savings increase amongst the Households by the factor of almost 6 in quarterly terms and by 1.2 in annual terms. If the Irish Government (and some analysts) are concerned with high savings rates, they are better off targeting companies accounts not household ones. But I doubt they are likely to start calling for a savings tax on MNCs.

Two charts below show long-term trends in savings components by sector. I reproduce two charts to show best-fit models and comparable models.

The charts above very clearly show that since about mid-2005, long term trend in Government savings diverged from those for Non-Financial Corporations and Households. Specifically, National savings became positively dependent on Households and real Companies and negatively impacted by the Government. In other words, current high Household savings rates are a saving grace for the economy that suffers from extreme pressures of Government deleveraging.

The third chart above clearly shows that Households contribution to total savings in the economy counter-moved with Government contributions, supporting the overall savings activity. In fact, correlation between Government savings and Household Savings averaged remarkable -0.91 in the period 2002-present and statistically-indistinguishable -0.89 since Q3 2006 through present. Over the same period of time, correlation between Government savings and Non-Financial Corporations savings runs at slightly lower -0.88 historically and -0.86 since Q3 2006.

27/7/2012: Ireland's Institutional Accounts Q1 2012

Some positive news on the economy front: Q1 2012 Non-Financial Quarterly Institutional Accounts are out today from CSO (link) and headline numbers showing no significant deterioration and even improvements in areas that do matter, except for the one that matters most to Government plans for the future.

The text below mostly quotes from CSO release linked above, with my comments in italics:

Point 1: The gross disposable income of households was €21,986m in Q1 2012 – an increase of €771m or 3.6% y/y.

This was driven by wages rising by +€170m and profits increases for the self employed of +€365m. Lower interest repayments on loans of -€272m further increased gross disposable income.

Point 2: Household expenditure fell marginally by €9m in Q1 2012 compared to Q1 2011 to €19,361m.

Point 3: Points 1 and 2 above mean that gross household savings increased from €2,439m in Q1 2011 to €3,209 in Q1 2012. The gross savings ratio, which expresses savings increased from 11.2% of gross disposable income in Q1 2011 to 14.2% in Q1 2012. Meanwhile, consumption of fixed capital by households fell from €1,056m in Q1 2011 to €1,037m in Q1 2012, and overall deficit in capital account for the households was shallower at -€154m in Q1 2012 as opposed to -€296m a year ago. This suggests that while deleveraging is still on-going, the rate of capital paydown has slowed slightly. In other words, households have slowed deleveraging and potentially increased capital acquisition. Albeit both effects are very small, these are welcome, if confirmed.

Point 4: An increase in current taxes of €673m between Q1 2011 and Q1 2012 was slightly offset by a fall of €312m in social contributions over the same period, resulting in an increase of €361m in the resources side of the government account.

Point 5: On the uses side of the account social benefits paid by government increased by €289m.

Point 6: Combining Points 4 and 5, the government savings deficit (resources less uses) showed an improvement of €125m – up from -€3,700m in Q1 2011 to -€3,575 in Q1 2012.

Point 7: When account is taken of investment and capital transfers, the net borrowing of the government sector amounted to €4,182m in Q1 2012 compared with €4,489m in Q1 2011.

Point 8: combining Points 4-7: in the nutshell, taxes went up faster than spending went up and voila we are ‘doing less worse’.

Point 9: A major bit: the rest of the world recorded a surplus of €994m with Ireland in Q1 2012 so that Ireland recorded a current account deficit with the rest of the world compared with a surplus of €1910m in Q1 2011. A swing of €2,904m in the wrong direction. Recall that per economics gurus of Green Jersey type, current account surpluses are the only hope for Ireland’s recovery. Oops…

17/2/2012: Struggling Households

Last week we saw the release of the special module from QNHS on Response of Households to the Economic Downturn – Pilot module Quarter 2 2011. This is undoubtedly a topic of much interest to economists, but also to the general public. The results are mixed - some surprises, and some 'I've told you' moments.

Summary of the findings as follows (via CSO):

• Overall, 79% of households cut back their spending on at least one of the listed items as a result of the economic climate in the two years before the survey. Which is not surprising, given the duration and the depth of the recession. In every economy there are always those (not necessarily the rich) who have relatively stable incomes even during the downturns.
• More than half (56% of all) households cut back their spending on groceries.
• More than half (57%) cut back spending on going out.
• Similarity in the two cut backs above suggest that much of these impacted the same households which were forced to cut on both - highly discretionary (going out) and necessary (food) items.
• Almost two thirds (64%) of households cut back their spending on clothing and footwear.
• Spending on health insurance was reduced by 15% of households and 11% of households cut back spending on pension contributions. This highlights the dangers for the Exchequer from the current course of Irish policy to continue increasing indirect tax charges and semi-state charges. Health and Pension Levies are undoubtedly likely to have the adverse impact on both expenditures, thus increasing the Exchequer exposure to health and pensions liabilities in the future. Note, the results of the survey do not cover changes in demand since June 2011.
• One fifth of households delayed or missed paying their bills (21%) in order to meet their outgoings on basic goods and services. 
• One in ten delayed or missed loan repayments and a further one in ten delayed or missed paying their credit card bill.
• In the two years prior to the survey 45% of households spent some or all of their savings to pay for BASIC goods and services over the last 2 years. And this in the environment of the elevated 'savings' across the nation.
• 62% of households reduced the amount being saved.
• The most financially impacted are families with 2 adults and children, which highlights the plight of the middle classes in Ireland.
• One in ten households borrowed money from family or friends to pay for basic goods and services in the two years prior to the survey. Unfortunately, we have no idea how many received transfers from the family members in kind or in cash, not in form of debt.

There were some clear differences in the behaviour of households depending on the age of the household reference person, whether or not they were working and whether or not there were children in the house.

• Cutbacks were far more likely in a household where the reference person was aged less than 55 years. Among households where the reference person was aged less than 35 or between 35 and 54 years, three quarters had cut back on clothing and footwear, compared with half of households where the reference person was aged 55 or older.
• While 64% of households where the reference person was younger than 35 had cut back spending on groceries, this compares with 42% of those where the reference person was 55 or more.
• Some 81% of households where the reference person was unemployed reported that they had cut back their spending on groceries in the previous two years, compared with 57% of households where the reference person was working.
• Households with children were more likely than those without children to cut back their spending on groceries, clothing and footwear, going out, and lessons or classes

The above age- and household- related results are not surprising. Older households tend to have lower unemployment rates, higher security or stability of income, greater savings cushions to offset cutbacks. Families with children face far smaller share of their income in the form discretionary spending, which means they generally will be forced to make more painful cuts. Families with children also have smaller savings cushions.

Overall, the picture of the household financial and consumption patterns revealed in the report shows that Irish households are facing severe recession and that the economy is unlikely to benefit from significant increases in 'confidence'-related spending and investment for a long time, including in the first few quarters of any upturn in national income, as households will most likely only slowly return to higher levels of consumption, preferring to rebuild lost savings and to repay family loans.

Crucially, the above changes are taking place while majority of Irish households are still struggling under the massive debt overhang. Going forward, this implies that (1) any hikes in interest rates will drive households deeper into cutting spending and using savings for necessities, (2) any increases in future income are likely to be consumed by debt repayments, without benefiting national consumption.

13/1/2012: Irish Household Income and Consumption: Q3 2011

The latest data on disposable income (Institutional Accounts) from CSO presents the picture of real recession ravaging Irish economy. Here are the core details from Q3 2011 - the quarter when Irish economy tanked once again in terms of aggregate GDP and GNP.

• Gross disposable income of Irish households in Q3 2011 amounted to €21,761 million - a decline of 4% yoy and a drop of 4.3% qoq.
• By use of disposable income (separate database proving longer historical series), gross disposable income of households dropped 3.8% yoy and 4.2% qoq.
• Final consumption has declined 3.8% yoy and 2.5% qoq.
• Gross savings of the households fell 3.9% yoy and 11.6% qoq

Using Q1-Q3 2011 data we can compute expected annualized series for 2011, which are shown in chart below. In annualized terms:

• 2011 is forecast to see gross disposable income of Irish households drop 2.9% yoy on 2010 and reach -14.2% cumulative fall on the peak at 2008
• Final household consumption expenditure is set to fall 2.7% yoy and 16.2% on peak at 2008
• Gross household savings is expected to fall 4% yoy and 17% on the peak in 2009

 Of course, in the above, Gross household savings includes repayments of debts, which is reflected in the fact that since the beginning of the crisis, our savings were rising, just as out incomes tanked.