Tuesday, July 19, 2011

Bottom Turning

The latest IBEC Quarterly Economic Outlook takes a detailed look at the prospects for consumer spending. Their view is that we are close to - if not at - the bottom of the economic cycle with regards to consumer spending and that recovery is imminent (next year, that is).

Consumer spending is a subject very dear to my heart, not least because demand for market research - the day job - is driven by growth in consumer spending. Broadly speaking, every 1% increase in consumer spending tends to increase spending on market research (by marketers keen to capture their share of that increase) by about 1.5%. Of course, a decrease in consumer spending has a proportionally negative impact on MR spending (I do hate symmetrical elasticities sometimes!). Nevertheless, the prospect of a recovery in consumer spending (albeit an anaemic one as per the table) is doubly welcome by me - good news for the economy and good news for business.

But a forecast is just a projection based on assumptions (genuine or hypocritical, as Robin Hanson would say). What are IBEC's assumptions? They start with the savings rate: which has certainly risen since the start of the recession. Much of that increase is driven by negative psychology, so logically a return to more positive psychology should reduce the savings rate. Are they right? Yes and no. Yes if the money really is being saved, no if the savings rate isn't quite as clear cut as after tax income deposited in savings accounts. Dan O'Brien recently pointed out that the data suggests the real savings ratio is actually lower than it seems because of debt repayments.

The important question though is: what will change consumer psychology from a negative outlook to a positive one? Here IBEC thinks that the Government must play a key role:
The medium-term fundamentals of the Irish economy remain solid and the potential growth rate is about double that of the euro area. Short-term difficulties remain, however, and Government must become more effective in how it communicates these challenges to consumers.

To date, it has not given householders certainty on the shape of the forthcoming budgetary adjustment and in response consumers have retrenched further. Government must now move to explain to households in an easily understood way how the budgets over the next years will affect disposable incomes.
Is that all?! It reminds me of an SME client who was recently asked by his bank for a two year cash flow projection to support an overdraft application. My client was somewhat bemused: he wondered a) what currency should he assume for two year's time, and b) how confident was the bank that they would still be around in two year's time? I think we'd all love to know how the Government's budgets over the next years will affect our disposable incomes... but I suspect they haven't the slightest idea how the rest of this year will pan out, never mind the next few years.

But IBEC are right about one thing: demographically our economic prospects (and consumer spending prospects) are indeed sound. Our long term prospects as a nation are good (I genuinely believe that) - but as we all know by now, the long run is made up of a series of short runs. And we only get to the future one short run at a time.

The same goes for Government, IBEC, consumers... and market research companies.

3 comments:

  1. Good to see a bit of optimism about the future, Gerard. We've had too much doom and gloom. Although the headline for this post made me smile a bit! :)

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  2. "The medium-term fundamentals of the Irish economy remain solid and the potential growth rate is about double that of the euro area. Short-term difficulties remain, however, and Government must become more effective in how it communicates these challenges to consumers.

    To date, it has not given householders certainty on the shape of the forthcoming budgetary adjustment and in response consumers have retrenched further. Government must now move to explain to households in an easily understood way how the budgets over the next years will affect disposable incomes."

    Who writes this stuff?!

    It strikes me that any real recovery will entail an end to this kind of meaningless patronising language, and meaningless assumptions so authoritatively stated.

    I was in Canada recently. It struck me how straight-forward they are in their institutional communications compared to here. Never would they come out with the above kind of nonsense. Rather they seem to treat their people as mature responsible citizens, and discuss their assumptions and best thinking on the matter in hand, and try and be truthful.

    Doesn't this country have enough of delusions? Particularly those delusions our 'experts' repeatedly told us was (is) reality and that undid the whole country?!

    I despair. We're in this much trouble and still we see important institutions trying to continue in the same vein.

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  3. Maybe just to temper the comment above. What I mean is that I wish peo[ple would declare their interests. Say what problems we are dealing with in all probability and how can we solve them so both sides' interests are taken account of. The numbers tell the story of the past. Look through the numbers and use a bit of imagination and the story becomes even clearer. Realise that the future is a function of the past and that the past is the source of learning for adaptation towards the furure and we might be getting somewhere. Production and consumption is inertwicably combined and the more respect you give to the consumers, the more you give to the producers. All clear now so.

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