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Savings bubble bursts as cost of living weighs on households

The assumption is that consumers are having to fork out more for energy, food and mortgages

A savings rate of below 10 per cent brings us back to pre-pandemic levels.

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Cantillon
Sun Dec 10 2023 - 05:00

The pandemic-induced savings bubble has burst. Central Statistics Office (CSO) data show the household savings rate fell from 11 per cent in the second quarter to 9.6 per cent (or €3.6 billion) in the third quarter.

A rate of below 10 per cent brings us back to pre-pandemic levels. At the height of the pandemic, consumers were saving over 20 per cent of their disposable income. An additional €16 billion was placed on deposit in 2020. This was bigger than the €12 billion set aside at the height of the Special Saving Incentive Accounts (SSIAs) scheme in 2006.

“In current prices, both income and consumption rose, with a decline in savings due to consumption increasing more than disposable income,” the CSO said.

The assumption is that consumers are not merely spending more on things such as transport, childcare, holidays and eating out, which were forgone or at least reduced during lockdown, but that they are being forced to fork out more for energy, food and mortgages, a consequence of the sharp hike in living costs brought about by the surge in inflation and interest rates.

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[ Irish inflation drops to lowest level in 2½ years as energy prices decline ]

While headline inflation has come down, prices haven’t gone backwards. The final bill for the cost-of-living crisis this year alone is likely to come close to €10,000, according to Irish Times consumer affairs correspondent Conor Pope.

[ Irish consumers to spend less but borrow more over Christmas, says CCPC ]

The full extent of the squeeze from higher interest rates may also still be ahead of us. Either way, the frothy savings patterns seen in the 2020 and 2021 are a thing of the past.

High savings were cited as a factor in surprisingly robust consumption data through the first phase of this inflationary period. Now the opposite is happening, with households unable to save as much or at all in the face of higher prices.

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