Monday 24 October 2016

We might be spending again - but is it because of confidence or hubris?

Published 06/12/2015 | 02:30

Christmas is just under three weeks away.
Christmas is just under three weeks away.

With just 20 shopping days left to Christmas, people aren't just figuring out what to buy - they are trying to figure out how much to spend. For some, six years of austerity have scarred their shopping habits for life. Others are feeling more comfortable financially and are thinking of splashing the cash, this Christmas in particular.

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More people working, a €1.5bn budget give-away, expectations of pay rises - even in the public sector - and an economy growing at 6pc per year, are making many feel better about spending money.

The question is whether we are going beyond confidence to hubris and from feeling good to feeling invincible. There is lots of evidence to suggest that having just said goodbye to the troika, some are really beginning to spend again. Yet in the Ireland of 2015, their neighbours simply don't understand where the money is coming from.

Between January and October this year, Irish people took 5.1 million trips abroad, half a million more than they did in the same period in 2011. So far this year, 35,000 additional new cars have been sold compared to four years ago, including 5,210 Audis, nearly 5,000 BMWs, 2,616 Mercs and 760 Land Rovers.

Elsewhere, hotels (particularly in Dublin) are brimming and restaurants are booming as consumers ratchet up their spending. Brown Thomas even has a new €29,000 Prada handbag. It appears to be a little "2006-ish"all over again.

A closer look at the figures suggests that much of the new spending splurge is reasonably well underpinned. The key test is whether people are borrowing too much money to fund their spending.

During the Celtic Tiger boom years, practically everybody's boat was lifted on the back of borrowing. The rich borrowed millions, the not so well off borrowed thousands. Overall, the evidence suggests that consumers and businesses today are still reducing their debts not growing them. Household debt peaked at around €200bn in 2009 and remained at similar levels until late 2011. It has since fallen to about €160bn.

Back in 2006, lending to Irish households was growing at close to 36pc per year. It has been in negative territory for six years now as consumers pay back more debt than they take out. Households may have reduced their debts by €40bn but it is still a massive €160bn, or three times what it was in 2004.

Irish households might have reason to feel a little better but they are not out of the woods yet. Legacy debt among families and small businesses in particular is very real and remains a drain.

The extraordinary growth in new-car sales reflect that renewed consumer confidence but despite the rises, consumers will still buy 40,000 fewer new cars this year than at the height of the boom.

According to the industry, the average price of a new car last year was 21pc lower than in 2007. Yet there are concerns. Lots of banks and motor companies are offering Personal Contract Plans, which make it relatively easy for people to drive away in a new car. Initial repayments in the first three years are low, but they might find after three years they aren't much closer to owning it.

Take a stroll around Dublin city centre on a Friday evening, or try to book a hotel at the weekend, and the place seems to be truly booming. Lots of people are spending money in restaurants, bars and on entertainment.

If you look a little closer, you will see many of them are foreign visitors spending foreign-earned cash. In the first nine months of this year, 1.2 million more tourists visited Ireland than in the same period in 2013.

Some of those spending money are young people from abroad who have moved to Dublin for work and are well-paid professionals. Others are young Irish people who were too young to get caught in the last property boom and so have very little personal debt.

A stroll around the centre of a Midlands town on a Friday evening is very different.

In 2006 people were buying holidays on credit cards, comfortable in racking up debt because of the equity built up in their houses. I am not so sure credit cards are paying for that much of the spending - yet.

The situation can always change. Banks are beginning to target suitable borrowers with tempting loan offers. I know of one businessman offered €1m in unsolicited loans. Yet for others, their legacy debt and negative equity continues to hold them back. The letters they receive have a somewhat different tone.

During the last boom we wondered where all of the money was coming from. It was borrowed from international banks by Irish banks, who then loaned it to us. This time round, significant, real profits are being made in business here.

The benefits are going to fewer people than in the Celtic Tiger days. This year the economy will generate the same value of economic activity as it did in 2006 - but with 132,000 fewer people working.

There is no one moment or day when an economic bubble forms. It happens little by little as real financial gains start to fuel unrealistic expectations and assumptions about the future. Irish people are just as capable of doing it to ourselves all over again.

The difference this time round is that many are so financially paralysed by the mistakes of the past they won't even get a chance to blow it again. The level of bank lending for consumer spending is a key figure to watch into the future.

Much of our spending so far has been well underpinned by real wealth but we have to be careful.

The Government has made more risky assumptions in recent months about the durability of its finances than many Irish households have about theirs.

Richard Curran is an Irish Independent commentator and presents The Business on RTÉ1 Radio this morning at 10am

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