Monday, June 27, 2011

What are we saving?

There has been a lot of discussion following from Michael Noonan’s comments last week that “what we really need is for people to go into the shops and start buying again”.   Stephen Kinsella has a good post on this.  As a follow up to this it is useful to consider just what it is Irish people are saving.  To start here is a highly stylised and artificial example.

Consider that society is made up of two groups and that the disposable income of each group is 50.  The first group is the Thrifty Group. Of their disposable income they spend 40 and save 10.  The second group is the Profligate Group. They spend their income of 50and also borrow an additional 10 to increase their consumption to 60.

In this first period aggregate disposable income is 100 and total consumption is 100.  The savings rate is zero.

We then move to the second period.  The situation and behaviour of the Thrifty Group does not change.  They continue to have a disposable income of 50, spending 40 and saving 10 of this.  We will also assume that the disposable income of the Profligate Group does not change but they are now unwilling/unable to borrow to fund their consumption and they spend their entire disposable income of 50.

In this second period aggregate disposable income is 100 and total consumption is 90.  The savings rate is 10% but this was driven by a change in borrowing behaviour.  There has been no change in savings behaviour.

Finally, consider a third period.  Again we will assume no change for the Thrifty Group but now the Profligate Group have to pay back the money they borrowed in Period One.  We will assume that this requires a repayment of five, thus reducing their consumption to 45.

In this third period aggregate disposable income is 100 and total consumption is 85.  The savings rate is now 15% but again it is not because of any increase savings behaviour.

In Ireland the savings rate has shot up in recent years. 

Household Savings Rate

The suggestion from Michael Noonan is because this is as a result of an increase in savings behaviour.  It is true that a gap has emerged between household disposable income and household consumption.

Household Expenditure

Although the data in this graph only go to 2009 all indications are that this continued into 2010 and will likely continue in 2011 and 2012.  In economics, the definition of savings is disposable income that is not spent. 

In 2008, both disposable income and consumption expenditure were around €90 - €92 billion.  In 2009, household disposable income fell slightly but consumption expenditure dropped from €90 billion to €81 billion.  The assumption is that this €9 billion is money that households could have spent, but are now choosing to save.  As we saw with our stylised example above, this could be a factor of borrowing rather than saving.

If we look at household financial accounts we see that this is more than likely the case.  First here are household deposits.

Household Deposits

During 2006 to 2008 when the savings rate was low household deposits were rising.  When the savings rate shot up in 2009, the increase in deposits slowed and had even begun to decline slightly during the end of 2010.   This is an aggregate of deposits.  It is likely for some households that precautionary deposits are increasing while for other households deposits are decreasing as they use them to offset significant reductions in income.

The savings rate might be a hefty 12% but this is not been seen in household deposits.  Michael Noonan may want people to go out shopping but they do not have an extra savings to draw on, household deposits are falling.

So where is the 12% savings rate going?  Well, as explained above it could be driven by a fall in new borrowings.  The Credit, Money and Banking Statistics from the Central Bank show that household credit is now contracting.

Household Credit Growth

The drop in growth of consumer credit is evident and since 2008 has moved from growing at 18% per annum to falling at 18% per annum.  Even if household income and savings amounts had remained unchanged this huge turnaround in consumer credit would have seen consumption expenditure fall.

Finally here is the aggregate amount of loans owed by households.

Household Loans

Since peaking in the middle of 2008, the amount owed on household loans has fallen from €203 billion to €185 billion.  Short-term loans have fallen from €14 billion to €9 billion.

The household sector may have a savings rate of close to 12% but there are no swelling deposits that could be used to boost consumption.  The savings rate has shot up for two reasons:

  1. Households are no longer borrowing to fund their consumption expenditure.
  2. Households are paying back the loans they previously used to fund their consumption expenditure.

One issue that cannot be addressed here is whether people are paying back these loans in an accelerated fashion.  The Financial Regulator produces data on mortgage arrears, those behind on their repayments.  It would be useful if we could get even a snapshot of those who are in mortgage advances, those ahead on their repayments. 

There may be households who are saving by paying down loans quicker than in the original contract.  It is difficult to say if this is true but the total amount of loans outstanding to households is falling quite rapidly.  It must be stated that it is falling from a huge height and is still 120% of GDP, well north of international averages.

So what impact is this huge savings rate having on household deposits? Very little.  What extra money is available for consumption? Not much.  There may be some money that is currently being used to accelerate the repayment of debt. This will continue for the medium term and once households have repaired their balance sheets they will be in a position to increase consumption relatively quickly.  It will take more than words from the Minister for Finance to get the tills rolling again.


  1. Phew. Someone reputable says it at last! Thanks.

    Some other bits that contribute:
    - where does interest fit in this? Is it part of consumption?
    - pension contributions are another thing to look at - many have had to up their contributions (and not just in the public service) as the value of their funds has tanked.

    The repayments don't seem to have gone to credit cards, anyway, as the balance outstanding has not significantly declined.

    A fair amount of mortgages have reset during the period from I/O to repayment - rolling from one I/O to another I/O seems to have ended. Shame we don't have any statistics on this.

    Looking at car loans might be useful, but we don't appear to have any stats on these either.

  2. Hi yoganmahew,

    Interest does not form part of the above analysis. Interest expenditure is subtracted from gross income as part of the calculation to determine disposable income. There is no choice when interest costs are incurred. I covered some issues relating to household interest here.

    Pension contributions are also subtracted from gross income when calculating disposable income. I can't tell if these have risen or fallen in recent times. Overall household social contributions (which includes payments to pensions) fell from €17.5 bilion in 2008 to €15.8 billion in 2009.

    I have some information on the credit card statistics here. These are only €3 billion of our €185 billion of household debt so any changes here will not be significant.

    Some insight into the number of mortgages that have gone from interest only to repayment would be useful. We know that about 25,000 have gone from repayment to interest only. I don't know of any source on car loans.

    I'm not sure I belong in the 'reputable' set!

  3. Well, 'reputable' in this context probably means using your own name... (you really are Seamus Coffey, aren't you?).

    Yeah, the credit card stats are revealing in some ways - there was a big run-up immediately before the bust which hasn't been paid off.

    As you say, the amounts are small. So what's the rest of it? Mortgage number estimates have varied between 90 bn and 147 bn at peak and I think settled at about 110 bn? Even taking the peak number and the peak CC number, there's another 35 bn of household debt. That's a huge amount. 15 bn of that is, I think, Credit Union related with partial matching deposits. The rest can't all be car loans and unsecured loans, can it?

  4. You make an interesting point about the breaksown of the total household loans of €185 billion at the end of last year.

    Looking at the Money, Credit and Banking Statistics for financial institutions operating in Ireland shows that these banks had €130 billion of loans extended to Irish households at the end of 2010.

    This was €138 billion in November 2010 but Bank of Scotland ceased operations here then. The households still have the loans but not to a bank operating in Ireland.

    The €130 billion is broken down as
    - mortgages €99 billion
    - consumer loans €19 billion
    - other loans €12 billion

    The mortgage arrears data from the Financial Regulator show that mortgage balances for Irish households were actually €117 billion. This is only mortgages in Ireland.

    Credit cards had a balance of €3 billion and credit unions have loans of about €7 billion but these are included.

    As you say, there is still a €30 billion gap. How many apartments did we buy in Bulgaria??

  5. "As you say, there is still a €30 billion gap. How many apartments did we buy in Bulgaria?? "

    Do we know if Home Equity Withdrawal/Remortgage with equity release/Second Mortgages are included in the 117 bn figure?

    The more numbers that are revealed, the more weird and obscure the picture gets.


    Could this explain some of the gap

  7. Sorry this is what I was referring to

  8. That could be well be it. On thinking about this it struck me that the gap could be explained by business loans to self-employed people which would be counted in the Household Sector in the Financial Accounts but could be counted as Business Loans in the Money, Credit and Banking Statistics.

    This would tie in with your suggestion that the €24 billion of buy-to-let mortgages would explain the gap.

    I would think that the full €35 billion gap would be accounted for by self-employed business loans and private investor buy-to-let mortgages.

    It does give the hope that there is some assets to offset the huge debts the household sector has assumed but that hope is in itself offset by the undoubtedly poor nature of those assets.

  9. 2Pack has come up with the missing billions - securitised mortgages:

    So there is 134 bn in mortgage debt...

  10. Or maybe not. The CB documents out today don't appear to say that.

    Where does the 185bn figure come from?

  11. Seamus. Good work. In conversation with people over the past year or two, I have made some version of this point time and again but never felt like I had the data to hand to confirm it, so I've never written a post about it. Your point of linking it to deposits data is something I should have thought of to confirm this but didn't.

    Anyway, I'll put up a link to this on the IE blog.

  12. I wonder what are the perspectives on a fourth period, after the Thrifties have seen their savings taxed and spent in order to maintain a level of activity in the economy that was only possible because the Profligates were being - well - profligate. What is the impact in the medium/long term?

  13. Seamus.
    Great post. Another myth debunked.
    Yet with deposits moving 'offshore', I don't know how these figures reflect that phenomenon

    On the run down of loans:
    "Since peaking in the middle of 2008, the amount owed on household loans has fallen from €203 billion to €185 billion. Short-term loans have fallen from €14 billion to €9 billion."

    Some of this would be car loans etc, easily got at the height of the boom usually with terms of 36/60 months. These are now coming to an end and not being replaced.
    The same type of deleveraging ('saving') is going on in industry. Even the successful companies are funding from cashflow, while the less successful are only a machine breakdown/truck breakdown from disaster. With no prospect of funds to replace the equipment. Saving the presence of course of good fitters who will be increasingly important in the new Maintenance Ireland.

  14. Very good analysis of the what the increased savings rate really means.
    However, the level of private/household deposits is still over 100bn (c 40K per household in a very simplistic breakdown). And this seems to be driving a lot of the current government's thinking. They seem to think that if people would just spend 5% of their savings then it might just re-start the economy.
    What do we know about these deposits? Is it all cash?
    It just seems like a very high figure to me.