Thursday, August 3, 2017

Major revisions to the savings rate mean the household sector is a net borrower. Really?

While a lot of attention will undoubtedly by on the business sector in the Institutional Sector Accounts and links to the new GNI* developments in the household sector are also worth a sconce.  In this instance it is not about what is there but what is no longer there – a savings rate above ten per cent.

Here’s the current account of the household sector account and looking at the numbers shows almost everything as one would expect.  Aggregate earnings are up, aggregate wages are up, aggregate disposable income is up.  All in all the income flows paint a pretty positive picture of our recovering household sector.

Household Sector Current Account 2011-2016

There is little in the income flows that gives cause for concern.  In 2016, mixed income (labelled Gross Operating Surplus) grew 4.9 per cent while aggregate wages grew 5.1 per cent with a 6.5 per cent rise in wages paid by non-financial companies.  Work though property income and interest, taxes and social contributions, and transfers and we get to the 3.8 per cent rise in Gross Disposable Income which is not put at €94.4 billion for the year.  All as we would expect.

While the growth rates may be in line with expectations, and have not been significantly revised (chart here), the levels have been revised – and revised down.  This means that the gap between income and consumption has fallen and now the savings rate is much lower than previously indicated.  Much lower.

Savings Rates - Old and Revised

The revision begins from Q1 2010 and has become even more pronounced recently.  The last estimate published in April gave a household savings rate that was reassuringly above ten per cent.  In the revised figures published this week the average savings rate shown above has only been above ten percent for one quarter since 2010 and dipped as low as five per cent last year.  This is not so reassuring.

So what has changed?  The savings rate has changed because Gross Disposable Income has been revised down. For example, the 2016 figure has been revised down from €99.5 billion to €94.4 billion.  That is why five or six percentage points have been knocked off the savings rate.

Why has Gross Disposable Income been revised down? It is pretty easy to spot from the household sector current account we looked at when the last set of figures were published.  The whole post gave a very coherent view of what we think is happening in the household sector.  Such coherence is absent now.

Anyway, the big change is in the very first line – Gross Domestic Product.  The value added produced by the household sector has been significantly revised down.  In the April figures this was put at €29.5 billion for 2016; in the current figures it is €25.8 billion.  Gross Disposable Income for 2016 has been revised down by €5 billion and nearly €4 billion of this is explained by a downward revision in the value added produced by the household sector.  It is much the same for the other years.  It is not clear why this revision was applied.  Maybe a chunk of activity has been reclassified from the household/self employed sector to the non-financial corporate sector which may explain part of that mystery.

Anyway, we can see the implications of this reduction in the savings rate in the capital account.

Household Capital Account 2011 2016

The recent rise in household gross capital formation means that household investment expenditure is now greater than household savings so the household sector is a net borrower – and as shown by the last line has been since 2014.  Between current consumption and capital investment Irish household’s spending exceeds their gross disposable income. So much for deleveraging.

Here are the current and previous estimates of household net lending.

Household Net Lending

Is the current estimate a flashing red light that have been largely absent as the Irish economy continues its rapid recovery?  Not particularly.  But maybe with the trend we should look at it as amber.  The trend is down but it is still a long, long way from the heady days of 2006 and 2007 when the household sector was a net borrower to the tune of €20 billion a year – and that was just for consumption and investment in new capital goods, the borrowing for second-hand houses was on top of that.

The revisions to the data are very significant.  Previous is was estimated that between 2010 and 2016 the household sector was a net lender to the tune of €27.4 billion.  Working through the financial account we were able to see how these funds were used to increase household deposits and, most notably, reduce household debts.

Now it is estimated that over the same six years the household sector was a net lender of just €6.9 billion.  Again this €20 billion revision corresponds the changed estimates of value added produced by the household sector which has been revised down by €20 billion.

The issue is that during a period when the household sector is now estimated to have been a net lender of €7 billion household deposits increased by €10 billion and household debts were reduced by €50 billion.  How did we do this with so little funds available from income?

Can asset sales, debt writedowns or other revaluations explain it?  The apparent coherence shown using the figures from April is no more.  Later in the year the CSO will publish updated financial accounts that will be consistent with these non-financial accounts and we will see what story emerges from those. 

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