24/6/20: COVID19 Social Impact: June 2020 Ireland

Interesting insights from the CSO on some impacts of COVID19 pandemic on general population: https://www.cso.ie/en/releasesandpublications/ep/p-sic19eep/socialimpactofcovid-19surveyjune2020asnapshotofexperiencesandexpectationsinapandemic/.

The following are of significant medium and long-term concern:

1. Health impact 1: 40.9% of all respondents to the survey report increased body weight since the start of the COVID19 restrictions, against 13.7% who report weight loss.
2. Health impact 2: "49.0 of newly labour inactive respondents (those in employment before the onset of the COVID19 crisis and currently not working) reported an Increase in weight. This compares with 37.6% of respondents that are currently working."
3. Health impact 3: The above health effects are most likely primarily driven by stress. For example: "Analysis of weight change by household composition found that a higher percentage of adults living in households with children reported having gained weight (47.5%) when compared with adults living alone (35.2%)." Given that households with children faced the pressure of not only own lockdown-related factors, but also the burden of caring for children and the pressures of home-schooling, changes in the health status are likely to be signifcantly driven by stress.
4. Precautionary savings: "Of respondents that reported reduced expenditure and/or an increase in income, just over half (51.1%) said that they have/will put additional money into Savings."
5. Workplace: Of the respondents who reported as working from home, 19.6% stated they do not have adequate work space and/or equipment. "Almost one in five (18.5%) respondents reported being Very or Extremely concerned about their employer’s ability to provide a safe work environment in the context of COVID-19."

What does this mean for business? Some thoughts:

• We are likely to see stronger focus on health and well-being when it comes to consumers voting with their Euros in months and years to come. Smaller, natural and sustainability-focused brands are likely to have an opportunity space as long as they can maintain value proposition. 
• The above also supports increased demand for personalisation of goods and services being supplied to consumers, a trend that will accelerate should COVID19 restrictions persist or even re-accelerate. 
• Financial implications of COVID19 will reinforce workplace and brand effects: as consumers return to work, they will increasingly demand greater safety and more direct engagement with their employers and brands. 
• Production processes will shift toward ensuring tighter control and quality delivery by the brands, which means that co-manufacturing and outsourcing will be less favoured by consumers than in-house production. 
• Direct-to-Consumer channels of sales will become more important, as they provide greater assurances to consumers of quality, provenance and ESG-impacts attributes of their suppliers.
• On investment side: organic cash flow-funded investment will become more important in years to come. This will be driven by greater preference amongst retail investors for liquidity and by the re-discovery of the need for cash-based safety buffers amongst the companies. Low cost of funding in the bonds markets and in the banking channel will also disfavour households shifting out of their precautionary savings accumulated during the pandemic.

I am sure there will be other disruptive factors at play as well. 

26/5/20: COVID19 Impact on Travel and Consumer Demand

Some dire numbers from Factset on changes in consumer preferences / sentiment through March-April 2020:

• "According to The Conference Board, consumer confidence has weakened significantly with the overall index falling from 118.8 in March to 86.9 in April, the lowest reading since June 2014." 
• "... older Americans (aged 55 and over) are much less optimistic than survey respondents under 55. This poses a problem as we look to economic recovery... [as] households in which the head of household is 65 years old or older represent 22% of total household expenditures in the U.S. In addition, this age group dominates spending at full-service restaurants and travel and lodging."

Things are getting worse in travel and transport sectors:

• "According to the International Air Transport Association, global air travel was down 52.9% in March compared to a year earlier, hitting its lowest level since the Global Financial Crisis."
• "In the U.S., jobs in air transportation fell by 27.4% in April."
• "The four major U.S. airlines—American, Delta, United, and Southwest—are prohibited from laying off or furloughing workers until after September 30 as a condition of receiving billions in payroll assistance as part of the CARES Act. But these carriers have been asking employees to take voluntary unpaid or lower-paying leaves, reduced hours, and early retirement."

On travel sector:

• "The April consumer confidence survey shows that just 31.9% of respondents intend to take a vacation within the next six months. This down from 54.9% in February and is the lowest reading ever in the 42-year history of this survey question."
• "We only have monthly personal consumption data through March... In March, consumption on accommodations was down 43.3% compared to February while air transportation had dipped by 53.5%." 

24/1/16: House Prices, Local Demand and Homeownership Status

House prices bust was a major dimension of the recent Great Recession around the world. Nonetheless, contrary to all evidence, many political leaders have opted to dismiss the adverse impacts of shocks like negative equity (due to price declines and pre-crisis debt ramp ups) and wealth effects on aggregate demand (first order price effects).

An interesting study based on the U.S. data tests the aggregate impacts of house prices changes on consumption, while controlling for homeownership status (renters v owners).

Titled “House Prices, Local Demand, and Retail Prices” and co-authored by Johannes Stroebel and Joseph Vavra (CESIFO WORKING PAPER NO. 5607, NOVEMBER 2015) the study used “detailed micro data to document a causal response of local retail price to changes in house prices, with elasticities of 15%-20% across housing booms and busts. Notably, these price responses are largest in zip codes with many homeowners, and non-existent in zip codes with mostly renters.”

In other words, not only impacts of house price changes are significant, they are also bifurcated across two types of home occupiers - owners and renters, with renters exhibiting effectively no sensitivity to home prices changes in terms of their demand.

The authors “provide evidence that these retail price responses are driven by changes in markups rather than by changes in local costs. … Markups rise with house prices, particularly in high homeownership locations, because greater housing wealth reduces homeowners’ demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes have opposite effects on the price sensitivity of homeowners and renters.”

Overall, “taken together, our empirical results provide evidence of an important link between changes in household wealth, shopping behavior and firm price-setting. Positive shocks to wealth cause households to become less price-sensitive and firms respond by raising markups and prices.”

So do house prices matter for aggregate demand? They do. Does homeownership smooth or amplify effects of shocks to house prices on the aggregate economy? It appears to amplify them. Should monetary and fiscal policies be asymmetric for areas with high homeownership concentration as opposed to areas with high renters concentration? Yep. Ditto for countries, instead of areas.

Of course, in the Euro area, how does one structure differential monetary policies across countries so diverse as renters-concentrated Germany vs homeowners concentrated Holland or Ireland? Err… can we check that one as yet another problem with Euro architecture?..

29/7/15: Retail@Google: Key Trends on Consumer Demand

Google folks made their Retail@Google event publicly available via videos. Worth listening through on key trends in consumer demand and retail services. The full even pages are here:
- Day 1 https://www.youtube.com/playlist?list=PLgIN4fB7J4qWK2np5oNbfW5_HlGUcdy4t
- Day 2 https://www.youtube.com/playlist?list=PLgIN4fB7J4qV_vPmv_T9k7Vpc54b_QDdn

My own contribution to the event is here: https://www.youtube.com/watch?v=XRR4KwtIYuE. I am looking at 7 key themes of the future in consumer demand, driven by geography of growth, technology and consumer demographics.

14/5/15: The Happiest Deflationary Consumers of Ireland... April 2015 Data.

Good thing Consumer Confidence is booming in Ireland, cause otherwise we might get a wind that domestic demand for goods and services is going nowhere:

Now, how would we get such an idea. you might ask? Well, simples.com : take a look at consumer prices:

Spot the trend? That's right: CPI was down 0.7% y/y in April and down 0.6% on average over the last 3 months.

And in case you want to see what 'sustains' at least some semblance of non-totally-collapsing prices? Why here it is:

Well, the only reason we are not a complete basket case come inflationary dynamics is thanks to tobacco and alcohol (up whooping 26.5% over the pre-crisis average thanks to tax extraction by the State), and electricity and rents (pushing housing, water, electricity, gas etc up 7.1% over the pre-crisis levels - you might also call that tax extraction, for much of these increases goes to fund semi-states and quangos and soon-to-come Irish Water), Health (where much of the 'savage cuts' were just something masking the actual hikes in cost of services to those of us who pay for them), and Education (where state extraction of funds was so rampant as outpace by a factor of 10 overall inflation in the economy), and Restaurants & Hotels (where the cut in Vat did nothing to alleviate price pressures on consumers), and a bunch of state-related and regulated prices that went into Miscellaneous category.

And so just as with retail sales, deflation is now consistent with rising consumer confidence. Happiness attained, at last. Just never ask what happens to demand when prices (imported from the rest of the Euro area) start creeping up across all sectors... that is something polite Irish economy forecasters don't want to talk about...

18/2/15: Inflation Expectations and Consumers' Readiness to Spend

In an earlier post I provided a rough snapshot of the evolving relationship between inflation and consumer demand. But here is a fresh academic paper covering the same subject:

Bachmann, Rüdiger, Tim O. Berg, and Eric R. Sims. 2015. "Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence." American Economic Journal: Economic Policy, 7(1): 1-35. https://www.aeaweb.org/articles.php?doi=10.1257/pol.20130292 (h/t to @CHCEmsden for this link)

From the abstract: the authors examined "the relationship between expected inflation and spending attitudes using the microdata from the Michigan Survey of Consumers. The impact of higher inflation expectations on the reported readiness to spend on durables is generally small, outside the zero lower bound, often statistically insignificant, and inside of it typically significantly negative. In our baseline specification, a one percentage point increase in expected inflation during the recent zero lower bound period reduces households' probability of having a positive attitude towards spending by about 0.5 percentage points."

In other words, when interest rates are not close to zero, consumers expecting higher inflation do lead to a weak, statistically frequently zero, uplift in readiness to increase durable consumption (type of consumption that is more sensitive to price variation, and thus should see a significant positive increase in consumption when consumers anticipate higher inflation).

But when interest rates are at their zero 'bound', consumers expecting higher inflation in the future tend to actually cut their readiness to spend on durables. Not increase it! And this negative effect of future inflation on spending plans is "significantly negative".

Now, give it a thought: the ECB is saying they need to lift inflation to close to 2% from current near zero (stripping out energy and food). Based on the US data estimates, this should depress "households' probability of having a positive attitude towards spending" by some 1 percentage point or so. In simple terms, there appears to be absolutely no logic to the ECB concerns with deflation from consumer demand perspective.


Update: a delightful take on deflation from Colm O'Regan: http://www.bbc.com/news/blogs-magazine-monitor-31489786. And a brilliant vignette on prices, markets, consumers and ... thought for deflation too: http://www.eastonline.eu/en/opinions/hobgoblin/economics-elsewhere-three-tales-that-may-rock-the-boat by @CHCEmsden h/t above.

18/2/15: Deflation and Consumer Demand: Euro Area Evidence

The key premise behind the risk of deflation is the argument that faced with a prospect of declining prices, consumers will withhold current consumption in favour of the future consumption and producers will delay current investment in favour of lower cost future investment.

The problem, of course, with this theory is two-fold:

1. It ignores the entirety of the evidence from the modern sectors (e.g. ICT services, ICT manufacturing and pharma) where deflation (falling prices of comparable services and goods, adjusted for quality and efficacy) has been ongoing for decades and the demand and investment grew, not fallen.
2. It ignores the totality of fundamentals that drive both demand and prices, and in particular the role of the after-tax disposable incomes available to support consumption and investment.

But never mind, the Euro area, griped by the fears of deflation is itself proving the meme of the deflation = bad, inflation = good as consumers continue to buy, because of falling prices, not despite of them.

Here's a telling slide from BBVA assessment of the European situation:

Thus, we have a question: why, then, do European policymaker fear deflation? The answer is a simple one: deflation hurts tax intake. So the real concern here is not for the wellbeing of the economy or consumers or society at large, but for the fiscal position of already over-stretched (and in some cases insolvent) sovereigns. 

12/12/2014: That Invisible Irish 'Trickle Down' Recovery: Consumers' View

In recent posts (see all five of them linked here: http://trueeconomics.blogspot.ie/2014/12/12122014-qna-q3-2014-irish-external.html) I covered in detail the latest official stats on Irish economic recovery/growth. The picture these figures present is of basically static domestic economy, with questionable quality 'exports-led recovery'.

So what's can one add to the above? Ah, just a couple of recent surveys.

Remember, the political meme is that the recovery is charging ahead and is trickling down to ordinary families and into the real economy. Which, naturally, suggests that households should be feeling better. If not fully 'great', at the very least better… So do they?

We can look at consumer confidence indicators from the ESRI to check. Alas, these are bearing negative relation with actual domestic demand. Still, on a shorter note, core retail sales have been rising recently - in volume - and a starting to show some life in value. Chart below illustrates just how weak the 'real recovery' has been despite the sentiment - as measured by ESRI - has been allegedly at all time highs:

But there are other surveys to look at.

Based on Amarach data: in April 2014, 41% of Irish people thought Ireland is a great place to live in. By November 2014 this rose to 56%.But less than half of us felt that there are
opportunities in Ireland for those who are prepared to seek them out (49% in November, still, a rise on 42% in April 2014). So the 'recovery' is not exactly the one where opportunities for betterment are being presented, even if we control for effort.

Good news is - people are getting more optimistic: in November, 56% of surveyed felt that better times lie ahead for the Irish economy, up on 48% in April. Hopium is a powerful drug, especially when dispensed in massive doses of Government-paid-for PR via all channels of traditional media. Allegedly, quality of life in Ireland is ranked as being high by a rising proportion of people too: from 48% in April to 56% in November, although we have no idea what this means, really, this should translate into a feel-good factor of sorts. Right? Well, let's give it a pause and think - the above are all issues relating to 'us' as a collective. Let's see what surveys said about personal.

View: "I feel angrier about austerity now than I have ever felt before." If things are so good at collective levels, surely they should good at personal level too? In November 2014, 49% of surveyed agreed with the above statement and only 16% disagreed. Wow! All the recovery and the goodies from the Budget 2015 and those feeling angrier with the state of our policies is outstripping those who do not by more than 3:1.

Confirming the above, 59% of Irish people felt that economic pressures are making them  depressed. Only 24% disagreed. 39% of Irish people felt that the economy (not the economists) is having a negative impact on their personal health. 29% disagreed. When asked of they feel being successful/very successful in managing their finances, 56% of us agreed back in September 2013, 50% agreed in April 2014 survey and 50% in November 2014 survey. So things are not getting better in terms of our perceived financial health over time. They are getting worse.

Do the people plan to 'vote' with their money for the recovery? Don't hold your breath, folks. Only 16% of us said they will loosen the purse strings a bit next year. 49% said they won't.

Here are some numbers on how we feel about the state of our financial affairs, not as a nation or as Troika

Well, the last line in the table above is telling.

But may be the above data is suspect? Well, why not check with the 'Optimists par excellence' from the ranks of Big 4 'consultancies'? Let's take a look at Deloitte. Surely they can see the optimism around?

Check out their H2 2014 Consumer Review. Here are the snapshots:

We feel, predominantly, no better about all major points of economic well-being today:

And we want to save more, spend less and borrow less:

So where's that 'trickle down' optimism contagion from all the feel-good policies the Government allegedly lavishing upon us all? Spot one beyond those jobs-for-life-and-pensions-for-free walls of the Government 'think tanks', if you can…

2/1/2014: Economics of Christmas

This is an unedited version of my Sunday Times column from December 29, 2013.


December is the month that economic forecasters learn to love and to hate.

They love the role the month plays in the annual aggregates for core economic time series. Get December trends right and you are free to bask in the warm glow of having an in-the-money forecast until the first quarter results start trickling into the newsflow.

They learn to hate a number of things that can make Christmas seasons notoriously volatile, especially around the time when economies switch paths from, say, recession to growth. Miss that moment and your forecasts will be out by a mile for a long time to come. Remember 2008-2009 when all analysts were racing against the tide of real data to update their projections downward? One of the reasons for this was that the peak of uncertainty fell on the last quarter. Secondly, Christmas behavior – by both consumers and businesses – is saddled with deep behavioural biases. This does not make holidays’ data fit well with mathematical models.

Ireland is a great case study for all of the above forces interacting with each other to underwrite our economic fortunes. Take the latest statistics, released last week, covering quarterly national accounts through Q3 2013. While this period does not include holidays shopping season, it is revealing of the strange currents in underlying data. Adjusted for inflation, personal consumption fell 1.22 percent in Q1-Q3 2013 and was down 1 percent in Q3 2013 relative to Q3 2012. In other words, household demand continues to underperform overall GDP and GNP in the economy.

This contrasts with continuous gains recorded in consumer confidence, which rose more than 21 percent year on year by the end of Q3 2013. In fact, the two series have been moving in the opposite direction since the mid-2009.

Some of the reasons for this paradoxical situation were revealed in the recent Christmas Spending Survey 2013, released by Deloitte. Despite the positive newsflow from the GDP and GNP aggregates, consumers in Ireland are more concerned with the state of domestic economy than their European counterparts. Overall, the percentage of Europeans who believe their purchasing power has diminished in 2013 compared to 2012 amounts to 41 percent. In Ireland, the figure is 48 percent. Only 26 percent of Irish consumers are expecting their disposable incomes to rise next year. In core spending cohorts comprising the 25-54 year olds, average proportion of population expecting improved incomes over the next year is even lower.

In other words, it seems to matter who asks the question in a survey and it matters what type of question is being asked. A question about confidence asked by an official surveyor yields one type of a reply. A question about actual tangible income expectations asked by a less formal private company surveyor yields a different outcome. These are two classic behavioural biases that wreck havoc with the data.

Despite the gloom, however, Ireland still leads Europe in terms of per capita spending during the Christmas season. Per Deloitte survey we plan to spend around EUR894 per household on gifts, entertainment and food in the last three weeks of December 2013, down from EUR966 reported in surveys a year ago and down from the actual spend of EUR909.

In brief, we are a nation of confident consumers with pessimistic outlook on the present and the future, who are spending less, but still outspend others when it comes to Christmas. A veritable hell of reality for our forecasters.


But what makes December a nightmarish month for those making a living predicting economic trends, makes it so much more exciting for research economists interested in explaining our choices and behaviour. For them, Christmas is when social mythology collides with reality.

Christmas purchases allow us to gauge the consumers’ ability to assess the value of things. In economics terms, the valuations involved are known as willingness to pay and willingness to accept. The former reflects the price we are willing to pay to obtain a pair of the proverbial woolen socks with a Christmas tree and Santa embroidered on them. The latter references the price we are willing to accept in order to give up the said pair of socks after they are passed to us by our kids with a ‘Merry Christmas, Dad!’ cheer.

In numerous studies, our willingness to accept is substantially higher than our willingness to pay – a phenomenon known as the endowment effect.

Christmas shopping data actually tells us that the endowment effect is present across various cultures. The data also tells us that the sentimental or subjective value attached to a gifted good is not a function of price. In other words, spending three times as much on Christmas festivities and gifts as the Dutch do, does not make Irish consumers any merrier.

But spending more has its costs. Some recent surveys indicate that up to one third of all Irish consumers will take on new debt during the Christmas season. In the Netherlands that figure is around one fifth. And long-term indebtedness is a costly proposition when it comes to social, psychological and financial wellbeing.

On the other hand, intangible quality of gifts matters to the consumers both in terms of giving and receiving. As the result, we tend to form expectations of what others value in gifts we give and we also match these expectation with our personal preferences. This induces series of biases and errors into our choices of gifts we purchase.

In Ireland, books represent top preference as a gift for both giving and receiving. In the majority of other countries in Europe, the matched preferences are for giving cash. Before we pat ourselves on the back for being a literature-loving nation, however, give this fact a thought. Giving cash provides a better matching between preferences of gift giver and gift recipient. In basic economics terms, cash gifts eliminate deadweight losses associated with gift giving. This, in turn, means that in countries where cash dominates physical goods giving, smaller expenditures on gifts achieve better outcomes in terms of recipients’ satisfaction. The reason for this is simple: we say we like something as a gift, but we still end up returning or recycling up to 30 percent (based on various studies) of gifts given to us. Why? Because goods are rearely homogeneous, so our preferences for books do not perfectly distinguish which books we like.

Gifts also have a reciprocal value. Christmas surveys have led us to a realization that the power of ‘give to receive’ thinking works well outside the holidays season as well. For example, charitable donations rise robustly when request for donations is accompanied by a forward gift from a charity. In one study, relative frequency of donations to a charity can rise by up to 75 percent when a gift is included with a request.

Still, research in economics overwhelmingly suggests that Christmas behavior by consumers delivers a significant deadweight loss to the economy and consumers-own wellbeing. In other words, our consumption patterns around Christmas can result in misallocation of resources that are not recoverable through the gains in retail sales, services, taxes and other economic activities. Given evidence from other countries, the deadweight loss from Christmas 2013 to the Irish economy can be anywhere in the region of EUR150-450 million.


Beyond economics of gift giving, popular mythology has it that Christmas is also a period of excess, especially when it comes to food and alcohol consumption. On average, this year, Irish consumers are expected to spend EUR259 on food per household. This is well ahead of the European average and reflects not only differences in prices, but also the level of alcohol consumption and our tendency to bundle food purchases with purchases of alcoholic beverages.

Culinary exploits of the festive season are generally subdued in quality and variety of food, but we make up for it with quantity. Marketing research suggests that the guiding principle to a successful Christmas meal is ‘safe, sound and abundant’ traditional dishes, rather than creative and experimental fare. Thus, virtually all cultures celebrating Christmas have a regulation-issued set of traditions designed to combat the festive season’s calories. These range from New Year resolutions (rarely followed through) to periods of fasting and abstinence (often tried, but rarely verified in terms of health virtues they claim to deliver).

One recent study looked at 54 million death certificates issued in the US from 1979 through 2004. The authors found that “there are holiday spikes for most major disease groups and for all demographic groups, except children. In the two weeks starting with Christmas, there is an excess of 42,325 deaths from natural causes above and beyond the normal winter increase.”

Another medical study found evidence of a significant weight gain in the US population during the December holidays. According to the study, the mean weight increased by 370 grams on average per person during the holidays. This weight gain remained intact during the rest of the year. In other words, all the New Year’s resolutions and health club memberships gifts cannot undo the damage done by turkey and gravy.


Last, but not least, popular mythology ascribes to the economists the definition given by Oscar Wild to a cynic: “A man who knows the price of everything and the value of nothing”. But studies of the Christmas data show that for economists, the size of the gap between sentimental value of the gifts and their retail or market prices is lower than for other professions. It seems, the economists know both the price and the value of Christmas gifts better than other consumers. Sadly, that knowledge seems to be of little help when it comes to understanding what is going on with the Irish economy at large.

Box-out:

The latest instalment in the European banking union saga agreed two weeks ago was heralded by the EU leaders as the final assurance that the taxpayers will never again be forced to shore up European banks in a financial crisis. In reality, the final agreement on the structuring of the Single Resolution Mechanism (SRM) is a sad exemplification of the bureaucratic dysfunctionality that is Europe.

In the US, a single entity is responsible for assessing the viability of a bank experiencing an adverse shock and subsequently determining on the action to be taken in resolving the shock. That authority is the Federal Deposit Insurance Corporation or FDIC.

In Europe, based on the latest agreement between the European Finance Ministers, the SRM will involve at least 148 senior officials across eight diverse decision-making bodies. The resolution procedures can involve up to nine, and at least seven different stages of approval. Majority of these stages require either simple or super-majority voting. The whole process is so convoluted, one doubts it can be relied upon to deliver a functional and timely response to any crisis that might impact Euro area banking in the future.

Is it time we renamed the European Banking Union a Byzantium Redux?