Tara O’Neill stands empty-handed and defiant outside a Marks & Spencer store on Dublin’s busiest shopping street. She won’t be tempted to buy anything.
“I’ve gotten rid of my credit cards and paid down my overdraft,” said O’Neill, 36, whose construction worker husband is in London after Ireland’s real-estate bubble collapsed. “Now we’re in recession. I don’t buy what I don’t have to.”
Irish retail sales are falling at more than twice the pace of the average in the euro region, after the government increased taxes and reduced salaries for state workers by 14 percent to help cope with Europe’s worst banking crisis. Consumer spending plunged 1.9 percent in the first quarter from the fourth quarter, the steepest drop in two years, according to figures published last month by the statistics office.
With household expenditure accounting for 53 percent of the economy, Ireland’s ability to emerge from its deepest economic contraction in history may depend on persuading people like O’Neill to start spending the cash they have left. The yield on 10-year Irish bonds rose to a record today amid speculation that the nation’s credit rating may join Greece and Portugal in being downgraded to junk.
Finance Minister Michael Noonan lowered the sales tax on everything from haircuts to meals to 9 percent from 13.5 percent starting July 1 and also has pleaded with consumers to replace their “clapped out” refrigerators and tumble dryers.
“There’s a whole generation of Irish people who were born to shop and they’ve had to change their behavior entirely,” said Austin Hughes, chief economist at KBC Ireland in Dublin, which publishes a monthly index of consumer sentiment. “It’s like they are burrowing deeper into their foxholes, saving and paying off debt, and only coming out for guerilla raids when they see a big bargain.”
Ireland’s economy has shrunk about 15 percent since 2007 and the unemployment rate tripled to 14.2 percent as key exporters, including Dell Inc., the world’s second-largest maker of personal computers, and Dublin-based drinks company C&C Group Plc fired workers.
Irish 10-year bond yields climbed 55 basis points, or 0.55 percentage point, to 12.98 percent, while the yield on two-year notes remained above 15 percent for a second day after Portugal lost its investment-grade rating at Moody’s Investors Service. Representatives from the European Central Bank, International Monetary Fund and European Commission are in Dublin for the quarterly review of Ireland’s 85 billion-euro ($122 billion) bailout agreement reached in November.
In this economy, consumers who helped drive what was known as the Celtic Tiger are now saving and repaying debt amid concerns about future increases in interest payments on mortgages that may be bigger than the value of their homes. Ireland’s savings rate rose to 13 percent last year from 3.6 percent in 2007, according to Goodbody Stockbrokers in Dublin.
Consumer spending is down 12 percent since peaking in the fourth quarter of 2007, based on figures from the national statistics office. In the euro region, consumer spending has returned to levels last seen before Lehman Brothers Holdings Inc. went bankrupt in 2008, said Hughes at KBC.
Speaking to reporters last month in Dublin, Noonan said it’s safe for people to spend again.
“He is talking through his hat,” Andrea Lambert, 28, a dental technician, said outside the St. Stephen’s Green shopping center in Dublin. “People don’t have more money to spend. Our wages are being hit, prices are going up, and people don’t have the disposable income.”
Tax increases and welfare cuts are costing households about 1,200 euros a year on average, Hughes said. That may rise as the government has pledged to reduce the deficit by about 4 billion euros in 2012, in part by introducing levies on real estate and water use.
Borrowing costs are climbing, with the European Central Bank raising its key rate to 1.5 percent today from 1.25 percent.
“People were taking out 100 percent mortgages, and just paying back the interest,” Margaret O’Leary, 66, who owns a company with her husband hiring out cranes that was hurt by the economic collapse, said outside the Marks & Spencer on Grafton Street. “They forgot all the zeros at the end.”
At the Brown Thomas department store, which has Hermes and Louis Vuitton boutiques on street level, sales are up this year, though still down about 15 percent from the peak of 2007.
“For the average person, one set of anxieties has probably been exchanged for a slightly different set of anxieties,” said Stephen Sealey, managing director of the 162-year-old Dublin retailer. “The unknown two years ago was much more am I still going to have a job. The unknown now is why does what is happening to Greece affect us.”
At the CHQ mall, located in the heart of the city’s financial-services district on the banks of the River Liffey, it’s hard to see any signs of recovery.
The 19th century warehouse, built as a tobacco and wine store, was converted into a mall in 2007. Thirteen of the 21 units are empty, with a tea shop, a children’s clothing shop and a shoe store among those that have exited. Louis Copeland, a tailor who has made suits for former U.S. President Bill Clinton, is one of eight retailers left.
“We are probably selling about half of what we were selling in 2007,” said Copeland, whose best-selling brand is Canali-designed suits, which usually sell for 900 euros to 1,100 euros. “You wouldn’t be selling the flash stuff. All the property developers and all that kind of business are gone.”
Drop in Confidence
Irish consumer confidence dropped in June to the lowest level since February, according to KBC Ireland and the Economic & Social Research Institute.
Tesco Plc, the U.K.’s largest retailer, said June 14 that sales, excluding gasoline, fell 3.9 percent at stores open more than a year in Ireland, the biggest decline of any non-domestic market with the exception of Japan.
Just off Grafton Street outside Marks & Spencer, O’Neill is just enjoying feeling “liberated,” she said.
“I sat down and went through all my direct debits, and cut over 500 euros from what we pay over a year,” O’Neill said. “We got rid of the luxury life insurance policy because I said we can’t afford to spend that in a recession.”