Thursday, September 12, 2013

Lehman Bothers

I've an article in today's Irish Times on the changes in Irish sentiment since the collapse of Lehman Brothers five years ago.

Unedited version below:

Resilience is like a battery. In the good times it gets ‘charged’ as we store up the resources, habits and relations that will see us through the bad times. It’s the ability to bounce back from disturbance and to cope with adversity. Today, after five years of bad times, it would seem our resilience battery sorely needs recharging.

Nevertheless, on some measures we Irish are still a resilient lot. At the end of 2008 - just months after the collapse of Lehman Brothers - my company asked a representative sample of 1,500 adults whether they had experienced any of a range of emotions or feelings ‘the previous day’. Five years ago, the top two emotions or feelings experienced by the majority of Irish people were ‘happiness’ and ‘enjoyment’. Fast forward five years to a new survey and the top two emotions are... happiness and enjoyment! Negative emotions are there too of course - stress and worry, for example - though for a minority of people. While the emotions experienced least are fear and anger.

I think this signals a number of things, not just psychological resilience but also a curious, Irish combination of ‘public anguish and private contentment’. In the same surveys the vast majority of people tell us how very worried they are about the economy and its prospects. But at the level of their families, friends and colleagues they’re getting by. This might also explain the remarkable quiescence of the Irish in contrast to other parts of Europe experiencing their own recessions.

One indicator of depletion is the trend in consumer spending. Total expenditure is down nearly 20% since its peak in late 2007. In some retail categories, such as pubs, spending is down to levels last seen in the mid-1990s. Irish consumers have voted with their purses and wallets to buy from cheaper suppliers and retailers - or not to buy at all - in order to make their limited resources go further. At the peak, our research was showing that consumers still considered convenience more important than price when buying groceries. But in 2008, price overtook convenience as the number one consideration, and it has remained that way since. In the past five years we have gone from a nation for whom shopping around looked ‘cheap’ to one for whom it now looks ‘clever’.

Our priorities have changed in other ways as well. In 2008 just 6 in 10 adults used the internet - today 8 in 10 are online. In 2008, fewer than 10% had a smartphone (the iPhone had only been launched in 2007) - today nearly 6 in 10 have smartphones. We’ll spend nearly €4 billion online this year - up from less than €1 billion five years ago.

A more cautious approach to spending also means we are still able to save, despite higher taxes and lower incomes. This year, Irish consumers will save nearly 6% of their after tax income, quite close to the 7% we saved in 2008, and well up from the 1% we put away in 2007.  As a result, the value of Irish private household deposits in Irish banks has risen from €79 billion in September 2008 to €86 billion in June 2013.

However, such general economic statistics hide the fact that the recession has not been evenly distributed. Our research has identified a number of segments in the population who are relatively insulated from the worst of the recession. Though it’s fair to say their share of the total population has declined in recent year. Here are a few indicators:

- five years ago, a large majority - 61% - of Irish adults felt that the recession was affecting other people more than them: that’s down to 43% today

- five years ago, nearly half - 48% - felt financially comfortable enough to make it through the recession: that’s down to 38% today

- five years ago, a large majority - 60% - were optimistic in spite of the economic situation: today the optimists are a minority - 44% - of all adults

- today, three in ten Irish adults have nothing left at the end of the month before their next wage or salary payment is due, while 55% don’t save regularly

- over a third - 35% - have recently borrowed money from friends or family to make ends meet

- only 21% of adults could cope easily with a €50 reduction in their disposable income due to tax increases and/or higher bills

Still, about two in five adults are having ‘a good recession’. Who are they? In our research they tend to be people with fewer debts than average (the youngest and the oldest age groups), as well as those who still have ‘options’ thanks to fewer commitments (e.g.: renting, smaller families etc) or more resources than average (e.g.: a higher savings capacity, two incomes etc).

As for the rest, one of the biggest issues is debt. Over the past five years we have learned the hard lesson that debt is a fact, wealth is an opinion. Not surprisingly, the main financial priority for the vast majority of people in recent years has been paying off their debts as quickly as possible. Our research shows that 30% of people with mortgages reckon they are now in negative equity (i.e.: the value of their home is worth less than what they owe on it). This jumps to 55% of home owners in their thirties. Furthermore, a quarter of all mortgage holders have missed one or more mortgage payment in the recent past.

Five years on and many Irish consumers are running out of road. Their resilience battery is flat. Yes, there are a few signs of improvement: in parts of Dublin, for example, or in some sectors of the economy such as IT and dairy farming. But it’s patchy at best, and woefully inadequate at worst. Irish consumers spent €94 billion in 2008; this year they’ll struggle to spend €83 billion. It’ll be a long time before we see a return to the spending levels of just five years ago.

The good news is that the younger generation that has come of age during Ireland’s recession doesn’t intend to let it get in their way. The vast majority of 18-30 year olds we surveyed recently intend to buy their own house by the time they’re 35; the majority expect to be married by the time they’re 30; and almost all expect to be a parent by 35 as well. We need our youth to be optimists.

The Irish are looking for new ways of dealing with recession, and new resources to restore their capacity to cope and persevere. In another survey we asked “who is making your life easier at the moment, and who is making life harder”? For the vast majority of Irish people, family, friends and colleagues at work are their biggest source of support nowadays. Even services like Facebook and technologies like smartphones are deemed to be making life easier in 2013. As for who is making life harder, utilities, banks and politicians rank the least supportive.

Five years after Lehman, people are finding new sources of resilience - new ways of recharging the battery - in our moribund economy. And that is a good thing. For it means that no matter what happens to our economy over the next five years, we won’t let the demands of the present starve the needs of the future. Not only will be able to bounce back, but our resilient spirit will enable us to bounce forward with hope and purpose.

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