Consumer spending in Ireland takes a Brexit hit

Date: 20 Feb 2017


The latest Consumer Market Monitor (CMM) published today by the Marketing Institute of Ireland and the UCD Michael Smurfit Graduate Business School showed that the continued recovery of the Irish consumer economy through 2015 and the first half of 2016 slowed significantly in the second half of the year, but still ended in positive territory.

“A reason for optimism is that the fundamental factors underpinning the consumer economy are still very strong, and should provide a counter-balance to any external shocks—in particular, the level of disposable income in the economy has grown back to almost €100 billion euro, close to the peak in 2008, driven principally by the large increase in employment, and this feeds through into consumer spending.” according to Professor Mary Lambkin, Professor of Marketing in the UCD School of Business and author of the report.

Speaking at the launch of the latest Monitor, Marketing Institute of Ireland chief executive Tom Trainor said: “The recovery in disposable income is big news. Driven principally by the large increase in employment, it’s driving consumer spending, meaning more customers for our products and services in 2017.”

Summary
2016 was a year of two halves in the Irish consumer economy — the first half showed very strong growth but this slowed down across all sectors in the second half. This is reflective of the global uncertainty caused by the Brexit vote in the UK, as well as the drama surrounding the US Presidential election.

Consumer spending growth rose by 4.2% in the first three quarters of 2016, year-on-year, but it is expected that the final figure for the year will be closer to 3.5%. This is one percent lower than the 4.5% growth achieved in 2015, but it is still a very solid performance, which is better than any of our EU peers. To put it into context, it is significantly higher than the growth in consumer spending in the UK which averaged 2.8% in 2016, and Germany which averaged 1.9%.

The signs are quite positive for 2017 although there are two competing forces affecting growth. On the one hand, consumer fundamentals remain very strong--the population is growing quickly, employment is still increasing, inflation is low and the majority of firms expect to give pay increases next year. On the other hand, the uncertainties surrounding the implementation of Brexit imply some downside risk.

On balance, however, the consumer economy is in a positive state and most forecasts suggest consumer spending growth ranging from 2.5 to 3.5% in 2017.

The improvement in the labour market has been a critically important factor driving the consumer economy and this remains very positive. There are now 2.04 million people at work, up 57,500 year-on-year, and up by 204,000 or 11% since the low point in 2012. Pay increases have also contributed, up 2% on average in 2015, and up by a similar percentage in 2016.

This increasingly healthy employment situation drives the amount of disposable income circulating in the economy, and spending closely matches income. The total amount of disposable income circulating in the economy peaked in 2008 at €102 billion. It dropped to a low of €85 billion in 2010, but was back up to about €98 billion in 2016, not far off the peak. In fact, there has been a remarkable increase in disposable income in recent times -- it increased by 5% in 2015, and by a similar amount in 2016.

Another important influence on consumer spending is household wealth, which comes mainly from the value of Ireland’s homes, as well as other savings and investments. After a long slump, Irish household wealth is increasing again as property values recover and progress is being made in paying down debt. Under normal circumstances, perceptions of increasing wealth raise consumer confidence, encouraging people to release funds for spending on various things.

Consumer confidence is still relatively strong in Ireland, even though it fell a little bit in the second half of 2016 due to worries about Brexit. However, the confidence barometer is still in positive territory and has got a boost in January of this year. This is driving a steady increase in consumer spending that is producing sales growth in most retail and service sectors. This is especially seen in sales of “big ticket” items – new cars, home furnishings, clothing and other consumer durables –all of which are continuing to grow well.

Sales of new cars are always a bell weather of economic recovery, and Ireland is no exception. Following several lean years, sales of new cars were up over 30% in 2015, to 121,110 units. New car registrations were up by a further 30% in the first half of 2016, but this slowed in the second half of the year, reaching a total of 142,688 cars for the year, an increase of 18%. Sales of imported second hand cars were particularly strong, up 47% for the year 2016, for a total of 69,371.This possibly reflects the weakening of sterling making imports more affordable.

Retail sales excluding the motor trade grew strongly in 2015, with volume up 6.1% and value up 2.7%. This rate of growth continued in the first half of 2016, with volume up by 5.5% and value by 2.7%. Growth slowed significantly in the second half of the year, to about half that rate, with volume up by 3.2% and value by 1.3%. For the year as a whole, retail sales were up by 4.3% in volume and 2.1% in value which is still reasonably strong.

Sales of services have also shown a bit of volatility in 2016, but ended the year up by 5.5% which is very close to the level of growth in 2015. The fourth quarter was particularly strong, up by 6.9% year-on-year. Information and communications were up by a whopping 17.5% for the year, following spectacular growth in several quarters. Accommodation and food services were also up by a strong 8.6% for the year.
Residential property is the sector under most pressure, and this has been the case ever before Brexit came into sight. There were 45,342 homes sold in 2016 and 23,589 mortgages issued, accounting for about 50% of sales transactions. This was actually lower than the 47,313 homes sold in 2015.

There were just 21,700 properties on the market, 1% of the total housing stock, in December 2016, which compares to an EU average of 4%.

Consumer Confidence

Consumer confidence in Ireland reached a record high of +16.7 in June 2015, and remained strong through the rest of the year. At this point, consumer confidence here was well ahead of the last peak in 2007, and well ahead of our European neighbours.

Unfortunately, consumer confidence fell steadily throughout 2016, with Q4 at 5.9, (compared to 16.6 in Q4 2015) reflecting uncertainly about Brexit, and industrial unrest. However, the figures are still in positive territory, above the long-run average, and have got a lift in January of this year which should continue to underpin a solid consumer economy.

Consumer confidence in the UK has also seen a significant drop in Q4 2016, as consumers are still worrying about implications of the Brexit referendum. This continuing downward trend is forecast to have a major impact on consumer spending in the coming quarters.

Consumer Incomes and Spending

Household disposable income rose by 5.5% in 2015 and by 4% in 2016 bringing it to a total of €98 billion, due to a combination of expanding employment and increasing pay rates. There are now 2.04 million people at work, up 204,000 or 11% from the lowest point in 2012. Pay increases of 2% were common in 2015 and 2016, also influencing the amount of money circulating.

Consumer spending began to recover in 2014, when it grew by 2%; it grew by a very strong 4.5% in 2015, and is estimated to have finished the year 2016 up by a further 3.5%. Of the main components of spending, retail sales (excluding motor trades) increased by 3.7% in 2014, by 6.1% in 2015 and by 4.3% in 2016. Activity in the services sector was also higher, up 4.1% in 2014, 5.7% in 2015 and 5.5% in 2016.
In sum, personal consumption is continuing to grow, but the rate of growth weakened in the latter half of 2016. Latest estimates suggest a final outturn for 2016 of 3.5% growth, and 2.5-3.5% is forecast for 2017. Vat receipts have followed a similar path, up by 7.9% in 2014, 7.1% in 201, but falling to 44% in 2016.

Personal spending in the UK has grown each quarter since 2011, at an average annual rate of 2%. This increased to 3% in 2015, and continued at this rate in 2016, suggesting that Brexit had little impact as yet.
Consumer Borrowing

Borrowing by Irish consumers grew at a record level from 2000 onwards and peaked in March 2008 at €150 billion, but declined steadily since then, down -39% to €90 billion in Q4 2016. Household debt is now at its lowest level since Q1 2006, at €31,216 per capita, and is continuing to decrease by about 2% per annum.

Loans for house purchase, which account for 84% of household loans, peaked in Q1 2008 at €124 billion. They decreased to €73 Billion by end Q4 2016, a cumulative decline of 40%, or an annual rate of -2.4%.

Lending for other consumption accounts for approximately 18% of total borrowing. This category peaked in Q1 2008 at €30 billion but declined to €12 billion by December 2016, a reduction of 60%. It is continuing to reduce at an annual rate of 2.6%.

Overall, the ratio of household debt to disposable income has fallen by 60% since its peak of 215% in mid-2011. This rate of debt reduction has surpassed most other countries. However, household debt in Ireland remains relatively high by international standards, at 153% of disposable income, making Irish households the fourth most indebted in Europe.

Retail Spending

Following five years of decline, retail sales achieved a significant turnaround in 2014, with volume up by 3.7% and value by 1.6%.

The recovery accelerated in 2015, with sales volume up by an impressive 6.1% and value up by 2.7% for the year. This growth in sales exceeded the growth in footfall (up 1.6%) providing evidence of a real uplift in spending.

The first half of 2016 delivered strong sales growth for most retailers, up by a very strong 5.6% in volume and 2.7% in value year-on-year. Retail sales continued to grow in Q3 and Q4, but at a slower rate of 3.3% in volume and 1.1% in value. For the year as a whole, volume sales were up by 4.3% and value by 2.1%.

Recent Trends

The final figures for 2016 show a year of two halves. Spending in all categories increased strongly in the first half of the year, but the rate of growth slowed by nearly half of the previous rate in the second half of the year.

New car registrations in the first half of 2016 were up 30%, but this slowed in the second half of the year. A final figure of 142,688 cars were sold in 2016 up 18% on the 121,110 cars sold in 2015. The 2016 figure is approaching the average sales level of the early 2000s.

Retail sales excluding the motor trade grew strongly in 2015, with volume up 6.1% for the year, and value up 2.7%. This rate of growth continued in the first half of 2016, with volume up by 5.5% and value by 2.7%. Growth slowed to about half that rate, however, in Q3 and Q4, with volume up by 4.3% and value by 2.1% for the full year.

All product categories except books/newsagents experienced growth in Q4 2016, but at a significantly lower rate than previous quarters. Household equipment which combines furnishings, electrical goods, hardware, paints and glass, was the only category to show continuing strong growth in Q4.

  • Food sales up 1.6% in volume and up 0.5% in value;
  • Non-specialised stores (supermarkets) up 1.7% in volume and 02.5% in value;
  • Fuel up 3.7% in volume and 3.9% in value;
  • Clothing, footwear & textiles up 5.7% in volume and 2.4% in value;
  • Household equipment up 7.5% in volume and 1.9% in value;
  • Department stores up 2.7% in volume and 0 in value;
  • Pharmaceuticals and cosmetics up 2.8% in volume and 1% in value;
  • Bar sales up 2.6% in volume and up 3.5% in value.
  • Books, newspapers, stationery down -3.1% in volume and -2.8% in value

The Q4 trade which covers the pre-Christmas period was particularly disappointing, up by 3.3% year-on-year, which compares to growth of 6.4% for Q4 2015. The month of December was even weaker, up by just 2% year-on-year, compared to an increase of 5.4% in December 2015.

Overall, the indications are that while retail sales are still growing, the rate of growth has slowed in the final quarters of 2016 which should be the strongest time of year. However, the signs are positive for 2017—confidence is rising along with spending power so there are reasons for optimism about the coming year.

Q4 Consumer Market Monitor (CMM)


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