Thursday, May 14, 2020

The strong position of the household sector (and the poor case for helicopters)

A couple of weeks ago the CSO published the Q4 2019 update of the Institutional Sector Accounts.  This is one of the most useful from the suite of macroeconomic datasets produced by the CSO but also one of the least used.  Here we will look at what it tells us about the household sector. 

THE CURRENT ACCOUNT

We will start with the current account which shows the generation of income

Household Sector Current Account 2015-2019

THE CURRENT ACCOUNT

The end point of the current account is that the household sector had a gross savings rate of 11 per cent.  This arises from the finding that of a gross disposable income of €117 billion, €106 billion was used for household final consumption expenditure (HFCE).  While the changes for 2019 are far removed from where the economy is now they can be helpful in telling us where we were before the crisis hit.

Household gross disposable income increased by €7.5 billion in 2019.  The largest contribution to this came from employee compensation which grew by €7 billion (though some of this would have been paid to the government sector through income taxes and social contributions).  As pointed out before the boom was in labour income rather than non-labour income.

Gross Operating Surplus/Mixed Income

The gross operating surplus/mixed income of the household sector rose €2.5 billion in 2019.  Preliminary figures provided by the CSO to Eurostat show that the mixed income component of this (essentially the earnings of the self-employed) rose by €1 billion to €13.5 billion.

The gross operating surplus component rose €1.5 billion to €17.5 billion.  The gross operating surplus of the household sector is derived from the provision of housing services, i.e. rental income less costs for maintenance, repairs, utilities and property taxes. 

Around 80 per cent of this arises through imputed rents – estimated rents of owner-occupiers for the housing services that they provide to themselves (and this income exits the above table as part of final consumption expenditure so has no impact on the bottom line). 

The remaining 20 per cent is actual rentals for housing which landlords receive for providing housing services to others.  When the NIE and annual sector accounts are published later in the year it is probable that these will show an increase of €1.2 billion in imputed rents and €0.3 billion in actual rents.

Summary of Income Changes

So a summary of the change in resources for the household sector in 2019 would be:

  • Employee compensation +€7.2 billion
  • Self-employed earnings +€1.0 billion
  • Imputed rentals for housing +€1.2 billion
  • Actuals rentals for housing +€0.3 billion
  • Property income –€0.1 billion
  • Social benefits in cash +€0.7 billion

All-in-all, gross disposable income for the household sector rose seven per cent in 2019, which in the absence of widespread inflation will have translated into significant real income gains.  Households used most of this increase for additional consumption.  As noted above imputed rentals of owner-occupiers will have risen by more than €1 billion and households will have used other parts of the increase in resources for purchases of goods and services.

Increased Savings

But household final consumption expenditure ‘only’ rose by five per cent. This means there was an increase in the gross savings of the household sector of €1.5 billion t0 €13 billion, giving a gross savings rate of 11 per cent.  The only time the household savings rate was higher than this in the past 25 years was in 2009 and 2010 and, of course, that was after a crisis had hit not before it.

THE CAPITAL ACCOUNT

We can turn to the capital account to see what the household sector does with these savings.

Household Sector Capital Accounts 2015-2019

In summary, the household sector undertook €9 billion of gross capital formation in 2019(mainly purchases and upgrades of housing assets).  In recent years, household investment spending has been growing rapidly albeit from a low base.  It doubled from 2015 to 2019.

Net Lending of the Household Sector

The bottom line is that the household sector was a net lender to the tune of €4 billion in 2019, with this going on the financial balance sheet – either through an increase in deposits or a reduction in loans.  This is actually a reduction on the net lending levels seen in recent years as a result of the increase in investment by the household sector but is far removed from the huge net borrowing (and fundamentally weak position) of the household sector in the run up to the crisis of a decade ago.

Household Sector Net Lending-Borrowing 2001-2019

This persistent net lending has seen the financial position of the household sector improve considerably in recent years.  In 2009, household loan liabilities stood at nearly 220 per cent of gross disposable income.  The latest figures indicate that this was down to 115 per cent in 2019 which is a remarkable reduction in a decade and brings it back pretty much to where it was before the credit-fueled excesses of the mid-2000s (it was 115 per cent at the start of 2003).

Additions to deposits also means that the household sector has more currency and deposits which again is something that brings things back to a position last seen in 2003.

Household Sector Loans and Deposits 2002-2019 CB Data

COVID19

What impact will COVID19 have on all this?  We know it is having a huge negative impact on the economy but when looking in aggregate terms at the sector accounts, the impact on the household sector will not be as large.  There will be significant income losses as self-employed and employee earnings will fall but these will be offset to some extent by transfers from the government sector. 

At this stage it looks like that between the government and household sector it will be the balance sheet of the government sector which carries most of the burden.  It may seem paradoxical but we could actually see the balance sheet of the household sector improve while we are the teeth of the crisis.  This is because household income will have held up reasonably well (again we are talking in an aggregate sense) but the opportunities to spend money have evaporated. 

Separate figures from the CSO show that, even for retailers that are open, 26 per cent of the population aged over 15 are “afraid to go shopping” (see Table 4(b)). That is one million people.

Looking at Table 11.1 of the Money and Banking Statistics published by the Central Bank shows that the deposits of Irish households in banks regulated by the Central Bank rose by almost €1 billion in March.  This was by no means an exceptional increase but the average monthly increase in household deposits in the banks since January 2018 has been €0.5 billion.

Ireland doesn’t need “helicopter money”. The reason people aren’t spending is because business premises are closed or because they are fearful; not because they don’t have money.  Helicopter money is only really appropriate, if ever, for countries that don’t have efficient social welfare systems. 

The fact that hundreds of thousands of applications, and crucially payments, for the Pandemic Unemployment Payment were processed in a very short period of time shows that Ireland does have an efficient system for delivering supports rapidly and effectively.  The money is been delivered and it’s going to people who need it.  We can stand down the helicopters.  Now if businesses could be reopened and fear reduced…

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