Tuesday 17 September 2019

Consumers still saving as Brexit overshadows falling sentiment

Flagging enthusiasm: European Union and British flags fly in front of the UK Houses of Parliament during a recent anti-Brexit march – Irish fears around Brexit have been reflected in the latest consumer sentiment index. Photo: Bloomberg
Flagging enthusiasm: European Union and British flags fly in front of the UK Houses of Parliament during a recent anti-Brexit march – Irish fears around Brexit have been reflected in the latest consumer sentiment index. Photo: Bloomberg

David Chance

Households continued to deposit more money with banks than they borrowed, according to the latest data from the Central Bank of Ireland.

The figures indicate that the scars of the 2008 financial crisis have not yet healed, despite ultra-low interest rates, and raise concerns over how far the economic recovery can run.

A separate report from KBC Bank showed that consumer sentiment in the State weakened for the third month in a row in October due to worries about the global economy and Brexit, even though the overall sentiment indicator was still in positive territory.

Ireland has recovered strongly from the 2008 financial crisis and is now growing more rapidly than any other country in the European Union, buoyed by foreign investment and a recent rise in domestic demand that is being fed by a higher number of people in work and rising wages.

In its report, the Central Bank said that, on an annual basis, net mortgage lending rose by 1pc to €733m, the 11th consecutive month of gains. Nonetheless with deposits increasing in net terms by €633m in September to stand at an all-time high of €103bn, banks held €11.3bn more in household deposits than loans.

KBC's Consumer Sentiment Index fell to 93.5 with its decline since July the largest three-month decline since autumn 2010. It is down from 104.8 a year ago and now stands at the lowest level since December 2014.

The downturn is in contrast to rising confidence in Europe and the US.

"This scale of drop suggests a major mood change on the part of Irish consumers of late. From circumstances in which they were sensing a clear if uneven recovery, it seems that Irish consumers are now entirely focused on the risk of a sharp and painful reversal," KBC economist Austin Hughes said in the report.

The decline came even as unemployment in Ireland edged lower in October to 5.3pc, closing in on a level where the State is at "full employment" and where wage pressures should start to build more strongly.

In a bid to prevent a repeat of the overlending that fuelled the boom and bust, the Central Bank has put in place loan-to-value and loan-to-income restraints, so as to cool the housing market, stop consumers from getting too far into debt and to discourage risky lending by banks.

Evidence from a research report by two of the bank's economists showed that since 2010 borrowers across the euro area were now older and have higher income than before the crisis.

In "boom and bust" Ireland, they noted, tighter lending standards, a drop in living standards and later participation in the workforce was driving some of the move to older borrowers.

The average age of purchasers here at the time a house is bought has risen to 37 years from 32 years between 2004-2008 and the percentage of borrowers over the age of 36 has risen to more than half from around a third.

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