Nation in grip of boom envy
Experts warn failure to feel recovery is souring mood Donohoe admits: ‘We must improve living standards’
THE economic recovery has given rise to a phenomenon of ‘boom envy’ which is leading many people to believe others are benefiting while they are being excluded, according to experts in the area of consumer sentiment.
And they warn that an evident gap between headline economic growth figures and the day-to-day reality for many households is “souring” the views of people that may eventually affect the overall health of the economy.
The warning comes as consumer confidence has suffered its largest drop since 2010 as people shun conspicuous consumption pre-Brexit in the final weeks before Christmas.
Yesterday, Finance Minister Paschal Donohoe said the comments from economists Austin Hughes and Dr Kieran McQuinn showed “how important it is to translate economic growth into improved living standards”.
Mr Donohoe told the Sunday Independent: “We can do this by creating conditions for sustained wage growth and then combining this with increasing the supply of housing and ensuring that taxpayers on an average wage are not paying the higher rate of income tax.”
Last week, the Organisation for Economic Cooperation and Development said Ireland’s economy will continue to enjoy robust growth over the next two years.
However, the pace is predicted to ease as the economy reaches full capacity and in the aftermath of external threats, particularly Brexit.
In its latest Economic Outlook, the OECD forecasts Irish GDP growth of 5.9pc this year. That will slow to 4.1pc in 2019 and to 3.4pc in 2020.
However, the OECD anticipates that domestic demand will remain strong, as unemployment heads towards record lows, which will add “significant” upward pressure to wages, which in turn could feed into higher inflation.
The organisation is predicting consumer price growth of 2.2pc in 2020 — compared to 0.8pc this year.
But while such forecasts are leading to claims that the boom has returned, the reality on the ground is still very different.
Two of Ireland’s leading consumer economists have warned that the economic crash, followed by Brexit, continues to cast a shadow over people’s outlook as significant numbers fail to experience a real increase in disposable income.
“Lots of consumers are still seeing their household finances under pressure so they are still very much in recovery mode from the crash rather than in a new boom period,” said Austin Hughes, chief economist at KBC Bank.
“There is a lingering feelbad from the crisis and there is a sense of ‘everyone out there seems to be having a boom but me’ so there is that element of exclusion from the recovery which is affecting people,” he said.
Dr Kieran McQuinn, research professor at the Economic and Social Research Institute (ESRI), said the fall in consumer confidence at a time when the economy was performing well was due to uncertainty over Brexit, global trading conditions, and heightened tensions between the US and China which inevitably impacts the Irish economy.
Mr Hughes said: “The other element still resonating from the crisis is a fear factor. So the world is a much more uncertain place.
“That uncertainty comes in the form of Brexit or US taxes or any range of things that could threaten to derail a still fragile recovery.
“There is still a sense that the Irish economy is improving but there is no sense that the improvement is delivering huge amounts in terms of consumers and in terms of incomes.”
Recent Central Bank figures showed total household wealth is now higher than at the pre-crisis period. But part of that reflects the fact that there are more households.
The position of the average household is still worse than in the boom, said Mr Hughes.
“The economy is doing better because there are more people working and living here. But if you were always employed, your income has not gone up a great deal.
“This distance from what is happening to GDP is probably souring sentiment to an extent,” he added.
“There is still a very pronounced fear factor and there’s a sense that finances are improving, but it’s two steps forward, one step back. You get a pay increase and then oil prices go up.
“So there is no sense among that element of people that it is party time again. There is a behavioural change in consumers who are basically in a guerrilla war with retailers. So they won’t buy until they actually see very significant discounting,” he said.
A Consumer Sentiment Index compiled by KBC Bank and the ESRI has plotted a downward trend in the past three months.
Mr Hughes said there has been a dramatic change from the conspicuous consumption of the Celtic Tiger period to one where most people have become conscious of the importance of getting a discount when making significant purchases.
Bagging a bargain was now the new method of ‘trophy’ purchases, whereas in the boom years of the past many people were happy to boast how big a price they paid for something they strongly desired, he said.
“Now it is how capable you are of foraging out bargains,” said Mr Hughes.
Consumers came out for Black Friday and will reemerge tomorrow for Cyber Monday.
“If we were still in the midst of the crisis, we wouldn’t be seeing these bargains because there would be no point in shops reducing the prices because they wouldn’t get the people through the doors.
“But there is that sense that now the game has changed where more careful consumers see it as OK to spend, provided they don’t pay full ticket price,” he said.
Consumer sentiment is expected to pick up much closer to Christmas.
“You will find this in consumer sentiment all the time that over Christmas it actually goes positive because people switch off and focus on family,” Mr Hughes said.
However, he added: “I think consumers are careful, they’re cautious, they’re afraid of an uncertain world and they are much more focused on how big is the discount that they’re getting.
“It’s sensible spending rather than conspicuous consumption.”
Professor McQuinn said: “The underlying activity in the economy is that it is still continuing to grow very strongly and the issues to do with consumer behaviour and consumption all appear to be growing quite strongly and robustly through the year.
“The Brexit situation is such an extraordinary situation it is literally saturating media coverage at the moment so it’s almost inevitable that something like that is going to have an impact.
“You are still going to see significant levels of consumer activity at the moment.
“Usually consumer sentiment tracks actual behaviour very closely but there are times when it doesn’t.
“Sometimes they don’t map each other exactly, sentiment and behaviour, but there is no doubt over the last number of months we have noticed a drop off in consumer sentiment, certainly,” he added.