Consumer Spending Fuels the Economy

Recent speculation in relation to the immediate future of the Irish economy has been largely pessimistic in content. This is mainly due to falling house prices, increasing interest rates and a slowdown in the construction sector, a pending property crash is often cited as well. Despite this lack of confidence however, latest figures show that the future may be looking brighter for the economy and the housing market. Central Statistics Office figures show that in 2002, GDP growth reached a peak of 6.4%. 2006 by comparison showed GDP growth levels at a 6 year low of 5.7%. At this present time, 6% is a healthy level of growth to achieve.

It is well known that consumption has a strong, direct correlation with GDP, as aggregate consumption is a major determinant of economic output. Many feared that with the maturation of SSIA’s this year, spending would increase rapidly. This sudden injection was also expected to be followed by a sharp fall in growth levels and an increase in borrowing to finance spending. This theory was in keeping with US and UK models where massive borrowing took place to subsidise excessive personal expenditure. So far however, neither of these trends have occurred, with consumers appearing instead to be ‘drip feeding’ the economy with healthy and continuous spending patterns. This is good news for the economy in general and should it continue, it should help to provide a more stable market environment.

BOI’s economist Dan McLoughlin hailed 2005 as a ‘bumper year’ as regards consumption, with growth in personal spending at a high of 7.3%. It is expected that this year a fall in output from the building and construction sector (which fell from 9.3% in 2005 to 5.6% in 2006) will have a negative effect on growth. We shouldn’t panic yet, however as with promising levels of consumer spending at over 7%, it is thought that growth in output levels might yet reach somewhere in the region of 6%. This is a relatively realistic expectation as in the eighteen months since the European Central Bank (ECB) began to increase its interest rates, consumption has hardly been affected.

In a climate where sceptics are abundant, many people are choosing to save a proportion of their incomes also, given the attractive interest rates. Many are likely to be biding their time and waiting for markets to level off before making major investment decisions such as property purchases. This theory is backed up backed up by showing that nearly half of all new mortgages are being taken out on fixed rates. Consumers are seeking certainty as to the cost of their borrowing and future repayments. Experts are predicting that with eight interest rate increases since 2005, we can expect one or possibly two more increases this year before they stabilise. By next spring, we should see positive awakenings in the housing market as buyers become more confident about investing. Given this latest information and the positive trends that have been identified, it is safe to be cautiously optimistic for the foreseeable future.

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