Aggregate improvement in the household sector motors along

Last week the CSO published the Q4 2017 update of the Institutional Sector Accounts (ISAs) which give us a preliminary insight into the full-year outcomes by sector.  The ISAs follow from the Q4 Quarterly National Accounts (QNAs) a few weeks ago.  For a variety of reasons the QNAs get lots of coverage and the ISAs close to none.  There is far more information, and better information, in the ISAs. 

Here we will look at the household sector. The snapshot shows the nature of the general improvement.

Let’s looks at some of the detail.  First the current account:

We could go through it but it is a picture of general improvement.  In the middle we see that Gross National Income, largely the sum of self-employed, employee and property income, is estimated to have increased by six per cent in 2017.  Once we account for taxes and transfers we get an annual increase in Gross Disposable Income of 5.1 per cent. 

With final consumption expenditure estimated to have risen by 3.1 per cent, the current account ends up an increase in the Gross Savings of the household sector; from 7.0 per cent of GDI in 2016 to 8.8 per cent of GDI in 2017.  This is still likely to leave Ireland towards the bottom of the EU15 ranking in 2017 as was the case in 2016.  [The legend in the chart is ranked by the 2016 outcomes.]

So what can we do with these Gross Savings from the current account?  Disposable income that hasn’t been used for consumption can either be lent (put into financial assets such as deposits or equity and/or used to reduce financial liabilities like loans) or used for capital formation (new houses, improvements/renovations of existing houses etc.)

Obviously, here we are looking at aggregate outcomes, so the outcome for individual households will vary. A household that has borrowed for consumption expenditure can further borrow for capital formation.  The aggregate descriptions refer to the outcome for the sector as a whole.

So what happens when we put €8.8 billion of gross savings into the capital account?

For 2017, it is estimated that the household sector undertook €9.2 billion of capital formation.  So all the gross savings from the current account was spent (or at least that was the aggregate outcome – some households were borrowing while others were savings) and after capital taxes and transfers we end up with a net borrowing outcome of around €200 million. 

In 2017, between current expenditure and capital formation, the Irish household sector pretty much spent all of its disposable income – and this has been the case for every year since 2014.

All in all, the growth rates for 2017 look very positive.  All sources of income are growing rapidly, current spending is growing but not as quickly, while capital spending is growing a bit faster.  All in all it paints a very positive picture.

One concern is that the Irish household sector has been a net borrower for the past three years.  The chart below shows household sector net lending/net borrowing for the EU15 in per capita terms.

It is not the crazy days of 2006/07 but after moving into the middle of the EU15 pack from 2009 to 2012, we have been drifting downwards since.

But this chart clashes with view that the Irish household sector is deleveraging.  In fact, as the last line in the previous table shows the Irish household sector has been spending more than it is earning since 2014.  Can this be true?

The Quarterly Financial Accounts of the Central Bank show that the loan liabilities of the household sector were €167.7 billion at the end of 2013.  The latest figure is for Q3 2017 which shows that loan liabilities had been reduced to €141.8 billion.

That the Irish household sector is reducing its loan liabilities is not a surprise.  But how have loan liabilities reduced by €16 billion over the past three years or so when expenditure, current and capital, has exceeded disposable income by €2 billion.  And it is also worth noting the currency and deposit assets have increased by €12 billion over the same period.

So where did the money come from to reduce loans by €16 billion and increase deposits by €12 billion if spending exceeded income by €2 billion?  That is a €30 billion gap in just three years and is something we may return to in a subsequent post.

For now we will focus on the growth rates rather than the levels.  The growth rates are motoring along nicely. 

Nominal household income grew by between five and six per cent in 2017. That is pretty strong. It would be much better to focus on that than chattering about how much of the GDP growth shown in the QNAs was due to iPhones (plus I suspect the very specific claim made by the IMF is wrong).