Tuesday October 05 2010
PANICKY consumers are not spending for a number of reasons. They have less money to spend, but economic uncertainty also means they are hoarding every spare cent they can lay their hands on.
The Central Bank was the latest institution to sound alarm bells yesterday about the eagerness of consumers to save and their reluctance to spend.
Concern has also been expressed by the Government that people just will not spend and instead are stashing any spare cash they have in the banks.
But many would argue that consumers are being rational by engaging in what is called precautionary saving at a time when the economic situation is so fraught.
Not all households have savings. Many families are just one bill away from financial ruin due to unemployment or severe wage cuts and tax hikes.
But in those homes where there is the chance to put even a few euro aside, some furious saving is going on.
Irish households have, on average, almost €44,000 stashed away.
And they do not want this money locked away into fixed-term accounts, with many moving their cash to instant access accounts as concerns mount about their future finances.
According to figures from personal finance advisers, Bonkers.ie, Irish people have €64.5bn in savings accounts, which doesn't include pensions, shares or investment products.
There is even more money on deposit in Irish banks once corporate deposits are added in.
For households alone the average savings work out at €43,851 per household, according to Simon Moynihan of Bonkers.ie.
Not only are people saving like mad but there has been a change in their savings habits which mirrors the turbulent economic times.
Between May 2009 and May this year, the amount of money in long-term deposit accounts went from €15.1bn to €10.2bn -- a drop of €4.9bn.
However, the amount of money in notice or instant access accounts increased by €4.9bn to €17.2bn over the same period.
Not only are people saving whatever they can, but the panicky times we live in means they want immediate access to that money and so are reluctant to tie it up for six months or a year.
The eagerness of consumers to squirrel away money is reflected in what economists call the savings ratio.
This currently stands at 10pc, according to Davy Stockbrokers.
The savings ratio measures savings and also takes account of the fact that people are paying down debt.
The ratio is way up from an average of 6pc between 2001 and 2006.
A spurt in spending is unlikely, especially when there are at least another four austerity Budgets to come as the Government attempts to reduce dependence on borrowing to fund day-to-day state spending.
Lobby group Retail Ireland made an entirely reasonable point yesterday when it called on the Government to give people some idea of how they will be affected by December's Budget.
Who in their right mind would start spending now when they know few will escape from the €4bn in cuts and tax rises we can all expect?
Retail Ireland's Torlach Denihan said the planned cuts and tax hikes need to be translated into specifics as soon as possible, so consumers know where they stand in terms of net disposal income.
Otherwise, money will continue to end up sitting in bank vaults, and will not appear in the shops any time soon.