Wednesday, June 29, 2011

Recession has psychological impact on consumer

Spending savings is not an easy thing for the consumer, writes Bill Hobbs

In urging us to spend our savings, Minister Noonan sounded like King Canute in reverse. Instead of commanding the tide to stop coming in, he is trying to command the tide to stop going out and come back in again. The problem for the Minister is while the export sector is doing well, the domestic economy isn't. It’s continuing to contract as we save more and spend less of our reduced incomes.

The psychological impact of one of the most dramatic of economic reversals means that we will not feel safe to act as consumers for some time to come and we will probably never spend as we did in the past, ever again.

We have woken up to just how vulnerable we really are. And we may be learning how to use money wisely, particularly its most dangerous kind - credit. 

Two things are happening. We are saving more and paying down debt faster than before.

During the boom, the wealthier we felt the more we spent and the less we saved. As we believed our earnings would continue to grow, we expected our future income would finance current consumption. We spent more than we earned by borrowing money.

While many of us lived comfortably within actual income, others, buying into the boom time metaphor of the irreversible high tide that lifted all boats, lived within their anticipated incomes. It was a tide that had to turn and when it did, it retreated faster than it came in.

While high tide has left its physical mark seen in part-finished housing developments and empty office buildings that are likely never to be completed or occupied, there is another mark which is just as indelible. It’s our behavioural response to the destruction of household wealth. 

Because we now feel poorer, we are spending far less. And as we fear tomorrows income may be less than today’s, we are living not only within today’s income but increasing our precautionary savings.    

For certain the tide will never rise as far as it did ever again. There will be no returning to credit fuelled boom time consumerism as we change our behaviours to live a new shared reality. 

That reality is being created through metaphor, narrative and story telling. We make sense of things through the stories we tell each other. While we may not have lost our job, we know stories of people who have. While our incomes may not have reduced too much, we know of others who are living on social welfare having exhausted their savings and redundancy payments. While our children may have a job, we know of others who have emigrated.

We are spending less and saving more as we have learned the brutal lesson of the dark side of consumerism which only works when we borrow from tomorrow to spend today. While not all is us are poorer, we all feel and act poorer. When we are uncertain about what tomorrow will bring we squirrel away what we can and stop spending what we can. And while precautionary savings are increasing, because we fear tomorrow will be worse and not better, our spending behaviour is also changing. This change will last long after the precautionary impulse wanes. One thing is for sure as we now demand higher quality goods and services at fairer prices then suppliers will have to meet our expectations. Until prices come down to meet our expectations there will be no reversal in the decline in consumer spending.

Is there is an emerging future barely visible at this time? A future where lessons learned will be put to use. By unlearning compulsive consumption habits we will probably spend far less and save more of our disposable income for a long time to come. We will never again borrow from tomorrow to spend today. We have already started on this path. Our behaviour illustrates not just a fear for the future but a deeper shift to a more prudent, far less exuberant consumerism.

Just as King Canute couldn’t command the tide to turn back, Minister Noonan can’t command it to some back in. It’s continuing to retreat and when it does come back in it will never reach the high watermark it once reached.

If this is the case then any national plan for the future must accept that economic recovery will be different this time. Sure we will need to export out way out of this mess but we will also have to adjust our expectations of what domestic economic recovery will be like. Has a shift to the wise use of money and prudent, pragmatic, value seeking consumerism been factored into economic forecasts?

A version of this article appeared in the Irish Examiner, Business Section, Monday 27th June, 2011



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