Central Bank eyeing SSIA-style boost from savings

Billions primed for post-Covid consumption boom, according to Central Bank

Boost: Sharon Donnery, deputy governor of the Central Bank. Photo: David Conachy

Jon Ihle

March 30 2021 04:42 PM

Additional spending from built-up savings in the last year could inject €5bn into the Irish economy once the pandemic recovery gets underway, according to new Central Bank research.

The potential spending boost would be equivalent to adding five percentage points to aggregate consumption – similar to the estimated spending released from maturing Special Saving Incentive Accounts (SSIAs) in the mid-2000s.

However, much of the extra savings in people's accounts is likely to go on foreign travel, imported goods and housing deposits, dampening the impact on economic growth and potentially pushing real estate prices even higher.

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In a new Economic Letter on saving during the pandemic published today, Central Bank economists estimated that Irish households put away €10bn in excess deposits, or 8pc of disposable income, between the first quarter of 2020 and the first quarter of this year.

That cash came from a few sources: involuntary saving from reduced spending opportunities, an increase in average disposable income for many households due to Covid-19 supports, and earnings growth in sectors not directly affected by the pandemic.

Because these savings are not precautionary, as in a typical recession, the authors of the paper expect about half of the money – or €5bn – to be spent in line with windfall spending norms.

"If...these savings are being accumulated because people can't spend their income due to the restrictions in palace, or so called 'deferred spending', these savings may be view as 'extra income'," said Sharon Donnery, deputy governor of the Central Bank of Ireland, in an address on the topic to NUIG Galway's Whitaker Institute.

"In this instance, research suggests that roughly half of these savings may be spent or consumed, which would suggest a boost to domestic demand."

Moreover, those in the top income groups have both the greatest total savings and the highest propensity to spend the most in restricted sectors such as personal and social spending – restaurants and pubs, for example.

The top 30pc of earners have 50pc of the savings and spend more than the average on personal care, going out and culture.

This means that those sectors hardest hit by lockdowns in the past year, such as leisure and the arts, may get the biggest post-pandemic boost from the release of savings from bank accounts.

However, the paper points out that such spending is not easily substituted between time periods, so it is unlikely that all of the business lost during the pandemic will be recovered by recovery splurges.

Another factor that could limit the positive economic impact of deferred spending is the high amount likely to go on foreign holidays, vehicles, household furnishings and clothing – most of which are classed as imports, meaning the money leaves Ireland.

Spending on these categories is about 50pc of all spending across income groups.

Some of the pent-up savings is also likely to be kept for house deposits, potentially adding significantly to the €1.2bn in first-time buyer down-payments from 2019, putting upward pressure on the price of a new home.

The economic damage of the pandemic has been so deep that the €5bn of deferred spending alone will recover just a fraction of the €9bn in lost consumption in 2020, according to the paper.

However, it is expected that in addition to spending accumulated savings from the last year, households will also save less, in effect reverting to the pre-pandemic trend of about €8bn per year.

That, combined with low interest rates making cash deposits financially unattractive, could add even more to aggregate consumption in the coming years, returning Ireland to a more normalised strong growth trajectory.

Online Editors