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Sunday 22 September 2019

Rise in 'comfort spending' as pay hikes on the way

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Mark O'Regan and Wayne o'connor

A return to full employment, officially marking the last stage of recovery after the economic crisis, will see up to 60pc of employers offer pay increases next year, which is predicted to lead to a significant increase in consumer spending.

The positive economic momentum is already pointing to what a leading economist this weekend described as increased "comfort spending".

A shift in consumer sentiment has been evident since early this year and has now almost returned to a 15-year high, with some households starting to spend spare cash on large electrical items, such as refrigerators, TVs or washing machines, or a new car.

Now predicted pay increases are likely to generate further spending activity next year.

The predictions come on the back of Finance Minister Paschal Donohoe's statement last week that Ireland will return to full employment next year.

'Comfort spending' will see thousands of Irish shoppers spend more in the run-up to Christmas. Consumers suffering from 'austerity fatigue' will significantly up their usual spend over the next few weeks.

Meanwhile, would-be house buyers, finding it difficult to gain a foothold on the property market, will also start to loosen the purse strings.

It comes as one employers' group last week said that 60pc of its members planned to offer increases next year.

The Economic and Social Research Institute (ESRI) also said pay hikes in the region of 2.5pc were realistic.

However, while Ireland's economy is on course to be the best performer in the EU for the fourth consecutive year, overall consumer sentiment remains cautious. The feel-good factor still has to filter down to include those on low incomes, or paying off large debts.

But the main high-street retailers are still expecting a high-spend Christmas.

Austin Hughes, chief economist at KBC Bank, believes people are less "fearful" than they were over recent years.

Some are "celebrating" the fact that they made it through the austerity years.

"Now that they feel the economy is doing better, they are willing to put their head above the parapet. They feel they should treat themselves.

"Comfort spending is a very good way of describing it - there's a sense that people can release the purse strings a little bit more."

But he warned the freewheeling spend culture of the Celtic Tiger era is not on the horizon. The economic hangover from that era is still being felt by many shoppers.

"There's a psychological scarring as a result of the crisis. People are dealing with legacy debt problems, or their salary hasn't increased; these are real reasons why they are constrained in how much they can spend. But the fact is that a coat, car, or washing machine, might be past its best at this stage, and needs replacing.

"However, there isn't that sense of people going on an economic roller coaster, with everyone saying how wonderful the view is.

"But the fact it's been so hard for so long means there is a fatigue element - and people feel now is the time that they deserve a bit of enjoyment.

"But we must remember many workers are not seeing any dramatic improvement in their financial circumstances.

"There's still not an awful lot in their wallet," said Mr Hughes. "Spending is going to pick up but it's not necessarily because consumers have a lot more cash at their disposal.

"It's primarily due to the fact that there are more people at work and our population is increasing.

"By and large, consumers are cautious rather than confident - they're exhausted rather than exuberant.

"The reality is that wages aren't increasing by very much. Bargain hunting is still a priority for many."

Mr Hughes said the appeal of picking up a value-for-money purchase in the New Year sales is as strong as ever.

Conor O'Toole, of the ESRI, says there has been a shift in consumer sentiment since early this year.

He said some households were starting to spend whatever spare cash was available on large electrical goods, such as on a refrigerator, TV or washing machine. "It might even be a new car," he added.

Meanwhile, ESRI associate research professor Edgar Morgenroth said increased pay would generate further spending activity next year. The predictions come on the back of Finance Minister Paschal Donohoe's forecast last week that Ireland will return to full employment next year.

The unemployment rate has been dropping consistently for the past 18 months, and now stands at 6pc, according to figures from the Central Statistics Office for October. Just 131,300 people of working age are without a job compared with 133,100 in September and 158,100 people this time a year ago.

"This means everyone who wants a job gets a job," said Mr Morgenroth. "If you go beyond full employment, that means wages will rise. This will also have an impact on prices, particularly on items that are not traded or imported, such as the cost of going to the hairdresser and other services. Wage inflation will be at a reasonably strong level at 2.5pc. Some of that is a catch up because you will see workers in the public sector getting some of their previous cuts restored.

"In the private sector, there are also deals being done to increase wages; expect that to continue through 2018.

"Someone has more money in their pocket, so, what is he going to do with it? Spend it. If he spends it on a meal, demand for restaurants go up, restaurants need more staff and that is how these boom and bust periods work. They feed on themselves. Spending goes up when people have more money to spend."

The predictions are in line with other forecasts from employers.

Chief executive of ISME, the small and medium enterprises association, Neil McDonnell, said 60pc of its members plan to offer increases, with 53pc of members to offer pay hikes in the region of 0.5pc to 5pc next year.

"Our latest pay research shows 34pc of SMEs will not increase pay this year; 26pc of businesses will increase pay between 0.5pc to 2.4pc; 27pc will increase pay between 2.5pc to 5pc; while 7pc will increase pay by more than 5pc," he said.

A recent IBEC survey found that 75pc of its members were planning to increase basic pay next year - but they expect median rises to be capped at 2pc.

Sunday Independent

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