Monday, August 29, 2016

A Cash-Strapped Recovery?

I've holidayed in Ireland this summer, and one of the things that has struck me on my travels is the number of shuttered and boarded-up shops: even on the main streets of seemingly thriving towns and villages. What's going on? The latest retail sales data for July from the CSO has been heralded as further evidence of recovery and proof, if proof was needed, that things are getting better. 

But I'm not so sure: there are two stories in the Retail Sales Index report, the one we hear about and the one we don't. The one we hear about is real for sure: the value and volume of retail sales keep rising year-on-year, with some sectors rising a lot faster than others. But there's another story we don't hear so much about and the clue is in the name: the Index of retail sales is indexed against sales way back in 2005 - that's eleven years ago. The Index has been running above it's 2005 level for some time now, so recovery all done? Not quite, because 2005 wasn't the peak in retail sales: 2007/2008 was and we're nowhere near the peak yet, as the chart below shows (I've excluded motor sales as they are a capital purchase rather than a measure of current consumer spending, plus they have their own 'funding' in place these days from the car manufacturers themselves):

In fact, retail sales - excluding the motor trade - are still some 20% below their peak, and I very much doubt they'll ever get back to that peak again (due to online shopping, discounters, sterling etc and many other factors I won't go into now but I see playing out with clients every day).

And there's something else going on: there doesn't seem to be enough money in the economy to sustain anything like the level of spending in years gone by - it's as if we're living through a cash-strapped recovery. Look at the Central Bank's data for currency in circulation and M2 (a broad measure of money supply): the former has risen inexorably over the same period as the retail sales data (start of 2005 to mid-2016), but the latter has been fairly stagnant:

What could be driving this? The obvious culprit is debt repayment, and sure enough the amount of money Irish households owe by way of outstanding bank loans is now below the amount they have on deposit with the same banks:

But it isn't just households that have been on a 'debt detox' after the 'debt binge' of the Celtic Tiger era - sometime soon, if it hasn't happened already, Irish businesses will have more money on deposit than they owe in outstanding debt:

It's no wonder then that retail sales are still so far below their peak: households and businesses are hoarding billions on deposit that they might otherwise have spent or invested - but the scars of the crash are still hurting and nobody wants to go through that again.  Add to this the fact that the 'pillar' banks are equally risk averse and would prefer to lend only to people and businesses that don't actually need to borrow then no wonder progress is slow: 'tits on a bull' and all that.

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