Irish consumer sentiment improved again in August

• Sentiment at best level in almost five years in August.
• Less gloomy views on personal finances may reflect the view that interest rates could fall again and remain lower for longer.
• Consumers still cautious and cash-strapped but becoming less pessimistic.
• Modestly better ‘macro’ view reflects easing fears that economy will weaken further.
• Will worries about what budget 2013 may hold undermine sentiment?

Irish consumer sentiment improved again in August. As a result, the KBC Bank Ireland/ESRI Consumer Sentiment Index rose to its highest level in almost five years. While the monthly change in August was relatively modest, it was the seventh increase in the past eight months. So, it appears that there has been a sustained change in the mood of Irish consumers thus far in 2012. We continue to believe that the improvement in sentiment is primarily driven by an easing in fears rather than by a radically more positive view of either the outlook for the Irish economy or consumers’ own finances. We also feel sentiment could be vulnerable to renewed worries about the Eurozone crisis or the nature and scale of further austerity measures in the upcoming Budget. That said, the recent trend in consumer sentiment appears consistent with the prospect of a stabilisation in household spending, a development that could make quite a difference to the outlook for domestic economic activity.

The KBC Bank Ireland/ESRI Consumer Sentiment Index rose to 70.0 in August from 67.7 in July. This month’s reading is the strongest since October 2007 (71.8). So, the Index has returned to levels last seen before the economic downturn fully took hold. This is not to say that the circumstances of the average Irish consumer are the same now as they were in the Autumn of 2007. Clearly, that is not the case. The nature of a sentiment index is that it attempts to measure the subjective mood of consumers. Five years ago, Irish consumers were becoming increasingly nervous about the economic outlook. On the evidence of recent data, those same fears are now beginning to slowly lift.
 

Irish Consumer Sentiment Not Driven By Global Factors

As has been the case for some months, movements in the Irish Consumer Sentiment Index do not appear to be primarily driven by international influences. The preliminary reading of the comparable US confidence measure, the Consumer Sentiment Index produced by the University of Michigan, improved slightly after two months of decline, though its most notable feature was a decline in consumers’ expectations to an eight month low. According to the EU Commission, sentiment among Europe’s consumers continued to sour in August. The ‘flash’ estimate of Euro area consumer confidence posted its weakest reading since June 2009. So, it would seem that the recent trend improvement in consumer sentiment in Ireland is at odds with developments in many other countries. This would tend to suggest it has been driven primarily by domestic influences.

The Sentiment Survey is designed to measure changes in consumer thinking in relation to a range of economic issues such as unemployment or changes in personal finances. However, there is always some possibility that consumers’ subjective assessment of these issues might be coloured by significant non-economic developments. In this context, we looked at responses given before and after August 6^th when Ireland secured its first medal in the Olympic games to see if any sporting-related ‘feel good’ factor might have influenced this month’s results. Responses given after this date were marginally more positive but not markedly so. As a result, it does not appear that the August reading was significantly altered by some encouraging Irish sporting performances during the survey period. Instead this month’s survey seems to reflect a further modest upgrading of the economic environment facing Irish consumers.
 

Household Finances Expected To Improve

The details of the August Sentiment Index show that four of the main components recorded monthly increases while one showed a decline. The drop was seen in consumers’ views of how their household finances had developed in the past twelve months. In part, the weakness in this element in August represents a correction after a sharp improvement in July. This reversed about one third of the previous month’s gain. In sharp contrast, consumers were a good deal more optimistic about the prospects for their personal finances in the year ahead. This likely reflects some impact from the ECB interest rate cut in July and the increased possibility of further ECB easing in the months ahead as well as the growing sense that interest rates will remain low for some significant time.

We think there is some risk that expectations in regard to household finances could be vulnerable to a notably increased level of speculation of late in regard to both the nature and scale of painful adjustments that could feature in Budget 2013. In this context, particular uncertainty about the form the proposed property tax might take could be a particularly unsettling influence.  This speculation might be expected to influence the September Sentiment reading. In addition, the recent rise in oil prices and global food prices may begin to worry consumers. Set against these influences, the possibility of a further ECB rate cut could offer significant support to sentiment but it is difficult to see the household finances element of the survey moving substantially higher in the months ahead.

The August survey also saw a slight improvement in the buying climate. Again, it is important to emphasise that this change was marginal. It could reflect some bargain hunting on final price discounts as summer sales ended. These results don’t suggest any marked improvement in Irish consumer spending is in prospect in the months ahead but they may be consistent with a broad stabilisation in spending. As pressure on household finances remains significant, any stabilisation could still see fairly volatile monthly movements in the official retail sales data as hard-pressed Irish consumers adjust their spending in response to various developments such as fluctuations in oil prices or aggressive promotions by retailers.
 

Economic Outlook Seen As Less Threatening

survey results related to the outlook for household finances, but the two ‘macro’ elements of the survey also improved compared to July. In both instances, the monthly changes were modest but the progressive improvement in these elements seen thus far in 2012 meant that the respective August readings were the strongest in five years, both in relation to the general economic outlook and prospects for the jobs market. It should be emphasised that at current levels the various elements of the Sentiment Survey continue to paint a picture of an Irish consumer who is cautious and cash-strapped. However, the notable feature of the survey thus far in 2012 is a clear easing in the number of consumers who feel things are set to get even worse. In August 2011, some 59% of consumers felt the Irish economy would weaken further in the following twelve months. That proportion has now slipped to 34%. This is still a greater number than the 27% who anticipate an improvement in the year ahead but we have now moved to the point where the majority of consumers expect the economy to stabilise or get slightly better rather than deteriorate further. It is very clear that conditions facing the typical consumer remain tough but this still represents significant progress compared to the seemingly relentless weakening in the Irish economy seen in recent years.

In summary, the continuing improvement in Irish consumer sentiment in August is encouraging even if relatively modest. The outlook for borrowing costs will continue to play a key role in the trend in the Sentiment Index in coming months and could offer further support. In contrast, an increased media focus on a range of painful measures that might feature in Budget 2013 could lead to renewed worries. It remains to be seen whether a still modest improvement in the mood of Irish consumers can withstand the threat that budgetary changes could markedly reduce household spending power in the coming year.  While most consumers realise that another tough budget is necessary, heightened uncertainty about what adjustments might be contemplated and how large they might be could weigh on confidence and spending in the months ahead.