April numbers highlight the damage done to the Irish economy as a result of the COVID-19 lockdown but there are some hopeful signs
The latest Consumer Market Monitor (CMM), published by the Marketing Institute of Ireland and UCD Michael Smurfit Graduate Business School shows that the Irish consumer economy collapsed in April with most sectors showing dramatic declines as a result of the Covid19 lockdown. However, several features of this crisis differ from the last recession and give cause for some optimism about the pattern of future recovery, according to Marketing Professor Mary Lambkin of UCD Michael Smurfit Graduate Business School, author of the report.
“Marketing will play a key role in driving business growth and recovery during and post COVID-19. Now more than ever, businesses will need to back their marketing strategy, to either win back their customers or acquire new ones. Different industries have different challenges but ultimately the consumer should be at the heart of all decisions made in order to survive and thrive post COVID-19,” said David Field, Interim Chief Executive of the Marketing Institute of Ireland.
The world changed beyond recognition during the first quarter of 2020 as a result of the global Coronavirus pandemic. While primarily a health crisis, the pandemic has also caused a severe economic shock impacting activity across all sectors of the economy. This shock has been felt first and foremost by consumers, especially those who have lost their jobs as a result of the shutdown of all non-essential businesses since March 27.
April numbers highlight the damage done to the Irish economy as a result of the COVID-19 lockdown but there are some hopeful signs:
We have gone from having a record number of people at work (2.36 million) and very low unemployment (4.7%) at the end of 2019 to having more than 1 million people receiving support from special unemployment payments and wage subsidy schemes.
There are currently 589,000* people receiving the special Pandemic Unemployment Payment of €350 per week on top of about 214,700 people on the live register receiving Jobseeker’s Benefit of €203. Combining these two groups, the current rate of unemployment is 28%. In addition, 53,000 businesses employing 456,200 people are having their pay subsidised under the COVID-19 wage subsidy scheme.
This situation presents a dramatically different outlook for the economy from that predicted earlier this year, with a major decline in all areas of activity. Economic activity as a whole (GDP) in Ireland is forecast to decline by 8-9% in 2020. This assumes strong growth in the first two months of the year, a sharp decline in the second quarter and a gradual recovery in the third quarter which gathers more momentum in the final quarter. This reduction is greater than the 2008/9 economic crisis (GDP fell 5% in real terms in 2009).
One way in which conditions differ between this crisis and the previous one is the level of government supports for the unemployed. It is estimated that employee support payments are protecting up to 75% of disposable income which should help to cushion spending. Despite this, however, a drop of 9% in consumer spending is forecast for the full year of 2020. This assumes a strong first quarter followed by a major drop in the second quarter, a modest recovery in the third quarter, and a good final quarter.
Card spending data which includes cash taken out at ATMs gives a good indication of the pattern evident in recent months. Spending on debit and credit cards combined was up by 10% in March compared to the same month in 2019. This was most likely due to the stockpiling that was witnessed in mid-March. However, card spending fell by 36% in April year-on-year after the shutdown of all but essential retailers and most services outlets.
This general trend varied considerably across spending categories. Retail sales of food and drink performed very strongly in March, up 19% year-on-year, and up 8% for Q1 year-on-year, partly because of stockpiling but also because people are staying at home and eating more of their meals there. It seems likely that this trend will continue and result in good growth for the year, of possibly 5-10%.
Sales of electrical goods and home furnishings also held up remarkably well in the first quarter, up 12% year-on-year, and were especially strong online (15% of retail sales). Anecdotal evidence points to purchases of fridge-freezers for storing food as a particularly vibrant category.
In contrast, clothing and footwear were hit badly, down 52% in March year-on-year, and down 21% for the quarter. Department stores were also badly affected, down 28% in March and 12% for the first quarter year-on-year.
Service sectors such as transport, hotels and restaurants, arts and recreation have experienced drastic falls in business (80-90%) in Q1 2020 and it seems unlikely that they will be able to recoup this loss over the summer. The most likely outlook is for a major loss of business for the year, possibly of the order of 25%.
In contrast, sectors such as information and communications, and finance and insurance have experienced relatively small declines in sales of 10-20% in Q1. This is because many of these services are considered essential and are subject to annual contracts which are paid by direct debit. However, banks and finance providers have moved to offer customers payment breaks on mortgages and personal contract plans (PCPs) where necessary.
Sales of big-ticket items like cars and property have also been badly hit. Sales of new cars were down 29% in March and sales of imported used cars were down 39% year-on-year. This decline in sales was further amplified in April when motor dealerships closed with sales falling by 90%. On this basis, sales of new and imported cars combined look like they may end the year close to the record low of 104,000 experienced in 2009.
Sales of residential property started the year positively; there were 8,142 sales transactions filed in the first two months of this year which was slightly up on the same period in 2019, and the number of sales agreed was also up by about 10%. The number of mortgages approved in the first quarter of 2020 (8,130) was also 7% up on the same period in 2019, and 6,700 were drawn down (82%) which is about the normal percentage.
All indications suggest, however, that sales have almost ground to a halt since March with agreed sales being put on hold in many cases. Industry experts are forecasting that sales will be down by 25-30% for the year.
Some of this lost spending may have been deferred and may come back later in the year. There is discussion in some corners about the effect of pent-up demand and whether this will give a noticeable sales bounce across various sectors in the latter part of the year. This will be welcome if it happens but is unlikely to make up fully for almost a whole year of lost sales.
The shape of the recovery and the pace at which it occurs will depend on several things:
• the restoration of employment and the duration of employment supports;
• the opening up of retailers, restaurants, bars and other consumer services;
• consumer confidence to motivate spending versus saving.
Having recovered from 2013 onwards from the last recession, consumer confidence dropped through 2019 amid worries about a “hard Brexit” and negative implications for the economy. Confidence actually picked up in January 2020 once Brexit happened, and looked promising for the rest of this year until the Coronavirus pandemic caused it to plunge to -24 in April (the March score was -3 suggesting that the survey pre-dated the shutdown).
Consumer Incomes and Wealth
Disposable income has grown for the past five years by an average of 5% a year on the back of rising employment and incomes reaching an estimated €119 billion in 2019.
At the end of 2019, there were 2.36 million people at work, up 55,000 (2.4%) year-on-year, and up by 500,000 or 28% from the low in 2012. Wages increased by about 3.5% in 2018 and 2019 with average weekly earnings reaching €768 last year, equivalent to annual pay of €40,000.
Household wealth stood at €800 billion in 2019, €470,000 per household or €163,000 per person. This was up by 80% from the trough of €430 billion in Q2 2012. As finances improved; household savings also increased by €1.5 billion in 2019 to €13 billion.
This healthy situation has been turned upside down by the Coronavirus. This is not so much because of a drop in disposable income –- it is estimated that three quarters of this loss is being made good by the special state supports -- but is rather because the closures of shops, restaurants etc. has removed the opportunity for spending. In fact, it is likely that people will accumulate significant savings during this time, simply because their spending is curtailed.
Following the last recession, consumer spending turned a corner in 2014 and grew by an average of 3.4% each year up to 2018.
Consumer spending grew by 2.8% for the full year 2019 to a total of €108 billion and was expected to continue on this trend this year and next.
Unfortunately, this positive scenario was overturned by the arrival of COVID-19 which has halted everything except essential spending. Based on a detailed analysis of various scenarios concerning employment and other factors influencing consumption, the Central Bank has estimated that private consumption is likely to fall by 9% in 2020. Other forecasts are a bit more benign, suggesting that household spending may decrease by 4-6% depending on various assumptions.
There were 54,200 homes sold to private households in 2019, an increase of 4% on the 53,294 sold in 2018. This was a modest rate of growth under conditions of high demand in the market. There were 32,835 mortgages drawn down in 2019 which was 7% higher than the 30,630 in the previous year.
This year started positively; with 8,142 sales filed in the first two months of this year which was slightly up on the same period in 2019 (8,049). The number of sales agreed was also up by about 10%. The number of mortgages approved in the first quarter of 2020 (8,130) was also up 7% on the same period in 2019. Of the 8,130 approved, 6,700 were drawn down (82%) which is about the normal percentage.
However, all indications suggest that sales have almost ground to a halt since March with agreed sales being put on hold in many cases. Building has also halted, and the number of new homes built in 2020 looks set to come in much lower than the 25,000 planned. Industry commentators are suggesting that sales for the year will be down 25-30% on last year.
Spending on services grew by 7-8% per year in 2018 and 2019. This was closely matched by Vat returns which were up 7% in 2018 and by 6% in 2019 for a total of €15 billion.
The latest data on services are for March 2020 and do not show much impact from the COVID-19 crisis. However, advance indications from the AIB Purchasing Managers’ Index (PMI) show that activity in the services sector dropped at the fastest rate in March 2020 since April 2009. Transport, tourism and leisure registered the fastest decline while technology, media and telecoms posted a record fall.
Sales of new cars have been weak for several years, down 6.5% in 2019 to 113,305.
Unfortunately, 2020 is proving to be worse again with sales for the first quarter down by 13% to 50,861.
Sales of new cars were down 29% in March year-on-year and sales of imported used cars were also down 39% year-on-year. Sales of new cars fell by 90% in April once motor dealerships were closed and sales of imported cars fell by 85%.
On this basis, sales of new and imported cars combined look like they may end the year close to the record low of 104,000 experienced in 2009, making this a very difficult year for all dealers and distributors.
Looking at Q1 2020, retail sales did not do badly, actually increasing by 1% year-on-year compared to Q1 2019. Most of the shutdown occurred in the second half of March, of course, so it should be more revealing to look at sales month-by-month rather than quarterly. The overall retail volume index for March 2020 was down by just -1.9% on February and by -0.6% year-on-year, which does not give much indication of what was to come.
These summary figures conceal enormous variation across retail categories, however, with positives and negatives more or less cancelling each other out. As can be seen in the table below, sales of food and drink were up by about 18% in March year on year, as a result of stockpiling in anticipation of shortages. Sales of pharmaceuticals/medicines were also up by 12% as were sales of household goods (electrical goods were up by 24%).
In contrast, sales through bars dropped by 54%, and sales of clothing and footwear were down by 51% in March year-on-year. Books, newspapers and stationery were also very weak, down by 30% year-on-year. Sales of fuel were also noticeably down in March, by 13%, as a result of cars being off the road for part of the month. These are calamitous figures which were most likely worse in April.
It is widely speculated that some of the sales lost to traditional retailers have been substituted by online purchases, and the evidence bears this out to some extent. Online sales as a percentage of retail in Ireland increased from 3.8% in March 2019 to 5.7% in March 2020. (Note: this does not include online retail sales going to exclusively digital retailers, e.g. Amazon, which amounted to a further 6%, bringing total online sales to about 12% of total retail sales).
*Figures up to date at the time of writing.
To read the full Quarter 1 2020 Consumer Market Monitor click here. Or to access previous quarters reports click here.