Irish consumer sentiment improved slightly in April

• Sentiment Index higher for the fourth month in a row for the first time since Jan 2007.
• Irish consumers still cautious but fears of extreme outturn continue to fade.
• Easing in worries may curtail precautionary motive for postponing spending but pressures on purchasing power mean domestic demand will remain weak.

Irish consumer sentiment improved slightly in April, for the fourth month in a row.  The KBC Bank Ireland/ESRI Consumer Sentiment Index rose to 62.5 from 60.6 in March.  Last month’s gain marked the first time there has been a sequence of four successive monthly increases since January 2007.  So, the April reading hints at a clear if relatively modest improvement in the mood of Irish consumers in early 2012.

The improvement in Irish consumer sentiment in April has to be seen in the context of an effectively unchanged reading in the comparable US measure, a modest weakening in Euro area consumer confidence and a significant drop in UK consumer sentiment.  So, it would appear that the improvement in the mood of Irish consumers last month reflected domestic rather than global factors.

US consumers have become a little more unsure in relation to the outlook for the American economy of late and it may also be that the run-up to the presidential election is focussing attentions on a number of important economic problems in the ‘States.  The weakening in Euro area confidence in April was largely driven by sharp declines in sentiment in Germany and Italy.  As the German economy remains relatively healthy, weaker sentiment in that country may reflect concerns about the broader Euro area while Italians are probably signalling anxiety about the likely impact of sharply increased austerity on their incomes and that country’s growth prospects.  In the UK too, budget tightening may have had a negative effect on confidence.  Unlike their Italian counterparts, UK consumers seemed more concerned about the impact on the economy as a whole than on their personal finances.  So, it would appear that while consumers on this side of the Atlantic are reasonably united in gloom about a generally poor economic situation, the specific concerns unsettling them vary somewhat from country to country.

In the absence of a common global driver of sentiment in April we must look to domestic circumstances to account for the small improvement in confidence among Irish consumers.  We must begin (as we do nearly every month) by emphasising that at current levels, the Sentiment Index suggests Irish consumers are cautious about Irish economic prospects and concerned about their household finances.  Nonetheless, the April reading seems to represent the continuation of a trend through the early months of 2012 which has seen a slow if steady reversal of the extreme nervousness that weighed heavily on sentiment towards the end of last year.

Viewed from this perspective, the improvement in consumer sentiment doesn’t appear to reflect a notably more positive view of current circumstances but instead it seems consumers are notably less fearful about more extreme downside risks to the economic outlook.  In general terms, it is understandable that any improvement in sentiment would come about in this manner rather than through a sharp and sudden increase in optimism.  As we noted last month, the financial situation of the average Irish household remains under significant pressure.  Similarly, it seems unlikely that we will see a sudden surge in activity or employment in the Irish economy that would deliver a clear feelgood factor among consumers.  Instead, what seems to be happening is that consumers’ worst fears are slowly fading even if they continue to grapple with the implications of a still difficult situation.  A gradual ‘thawing’ of the economic climate is unlikely to prompt a marked increase in household spending.  However, even a mood shift of this nature should offer a measure of support to domestic demand through the balance of 2011.  While spending power is still severely constrained, a strong ‘precautionary’ motive for postponing major purchasing decisions could begin to slowly fade as the threat of sharply poorer economic circumstances diminishes.

The details of the April sentiment survey suggest there were no seismic changes in Irish consumer thinking through the April survey period.  Four of the five main elements of the survey recorded modest increases while the fifth posted a decline.  The only negative component of last month’s survey was unemployment which retraced just over a third of the previous month’s outsized gain.  As such, the April reading still points to some improvement in the jobs market in the early months of the year, an outturn that likely reflects signs of stability in employment and unemployment as well as some significant new job announcements of late.  Although attitudes in relation to the broad economic outlook improved only marginally last month, the April reading was the healthiest for this component of the survey since July 2010.  In contrast to the experience of previous months, all the elements of the survey that relate to household finances improved during April.  Again, it should be emphasised that the changes were very modest and don’t suggest any dramatic change in consumer thinking.  That said, the improvement in the buying climate recovered all of the weakness reported in March.  This may owe something to seasonal purchases around Easter and probably should be interpreted as hinting at limits to the downside for consumer spending rather than suggesting the prospect of notably improved spending patterns in the months ahead.

In summary, the April sentiment reading seems consistent with a sustained if small easing in Irish consumers’ worries about the outlook for the Irish economy.  If the sort of economic ‘tremors’ that repeatedly undermined confidence through the past couple of years can be avoided through the remainder of 2012, the fear factor should ease further.  We remain a considerable distance from conditions in which a ‘feel good factor’ might emerge but, in a still very uncertain world, a continuing easing in nervousness among Irish consumers is probably about as much as could reasonably be expected and should begin to underpin domestic spending.