What Bond Investors Can Learn by Drinking French Wine in Dublin

  • Irish consumer spending starts to drive economic recovery
  • Bond yields may drop as Ireland's debt levels decline

Bond investors looking for a bit of insight into Ireland’s economic recovery might want to talk to Dublin vintner Pierre Chapeau.

Originally from Cognac in southwest France, Chapeau has run French Paradox in the city’s upmarket Ballsbridge district for the past 15 years, so he’s seen the boom and the bust. He expects Christmas sales this year to rise about 20 percent from 2014.

“It’s not back to the levels of the Celtic Tiger, but it’s coming back steadily,” said Chapeau, 59, who runs the store with his wife. “We are very linked to the economy. Sales this year are definitely up and Christmas seemed to start very early.”

The wine sales capture a broadening of the recovery in Ireland’s economy, once again the fastest-growing in the euro region. The early stages of the revival were driven by exporters operating in Ireland like Facebook Inc. and Pfizer Inc. Now, consumers are beginning to spend too, underpinning growth, pushing the nation’s debt levels down and providing scope for Irish bond yields to drop further in 2016.

Bigger Spenders

While personal debt remains among the highest in the euro region, consumer confidence is at a 10-year peak. The country’s statistics office said on Thursday that spending rose 3.6 percent in the third quarter from a year before. That demand will help the economy grow about 6 percent this year and 4.5 percent next year, according to the latest European Commission forecast.

While Ireland’s benchmark 10-year bond yields have fallen to 1.04 percent from a peak of 14.2 percent in 2011, borrowing costs are still above countries like France and Belgium. They hit a low of 0.65 percent in April.

“At the very least, Irish government bonds should be trading at a similar level to Belgium, but they are currently yielding just over 20 basis points higher in the 10-year area,” said Alan McQuaid, an economist at Merrion Capital in Dublin.

McQuaid is forecasting 2016 will see the biggest rise in personal spending since the 2000-2007 economic boom as employment rises, taxes drop and consumers recover from the nation’s worst recession since at least 1945. 

Prosecco Years

Chapeau’s French Paradox is located close to the headquarters of Allied Irish Banks Plc, which needed a 21 billion-euro ($23 billion) bailout. After the crash, many customers disappeared or bought prosecco instead of champagne, said Chapeau. “Or else they didn’t want to be seen out drinking wine,” he said.

Things are different now and people have more money in their pocket. In October, retail sales rose at twice the pace of the euro region average, and stores are expecting the best Christmas sales season in seven years, according to industry group Retail Ireland.

“This has been the year of the pay rise,” said Dermot O’Leary, an economist at Goodbody Stockbrokers in Dublin. “The stars are aligned for ongoing expansion in consumer spending.”

Irish retail sales sank by about 20 percent in the five years through 2013 and a gentler recovery may be no bad thing, said Chapeau.

While the Commission forecasts Ireland’s ratio of debt to gross domestic product will drop to 95 percent next year from 120 percent in 2012, household debt was 33,056 euros per capita at the end of June. In the EU, only Denmark and the Netherlands had higher household debt relative to disposable income.

“The last thing you would want is to go back to those crazy days,” Chapeau said. “When you have been through a boom and bust, and survived, every day is a good day.”

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