Irish consumer sentiment improved marginally in March 2012

• Easing ‘macro’ concerns lead to third successive monthly gain.
• Employment outlook also helped by spate of new job announcements.
• Irish consumers still cautious but fears continue to ease.
• Important disconnect between ‘macro’ and ‘micro’ conditions as household finances remain under pressure.
• Weak buying climate points to continuing decline in domestic spending.

Irish consumer sentiment improved marginally in March 2012, the third consecutive monthly gain.  The sharp deterioration in sentiment that occurred last December on fears of an imminent Euro meltdown has now been fully retraced.  While consumers remain very cautious and are particularly concerned about their personal finances, the extreme fears that prevailed late 2011 seem to be slowly easing.  The fact that the EMU collapse threatened late last year did not materialise is probably the key element in the recent turn in sentiment but a steady stream of new job announcements may also be playing an important role.

The KBC Bank Ireland/ESRI Consumer Sentiment Index increased to 60.6 in March from 57.0 in February.  The March reading is the strongest since October of last year.  At current levels, the Index still suggests the mood of Irish consumers is fairly downbeat.  The March 2011 reading of 60.6 compares to the series’ long term average of 87.3.  Of course, the sixteen year history of the series is shaped significantly by exuberance evident in early Celtic Tiger period and the subsequent construction boom.  The March 2012 survey reading is just above the average of the past 5 years (57.0) and roughly equidistant between that period’s May 2007 peak (85.7) and the trough seen in July 2008 (39.6).  So, the March 2012 Index might be seen to be fairly typical of the ‘new normal’.  Irish consumers are not quite as gloomy as they were at the peak of the crisis but they continue to see the major obstacles that preclude a return to solid growth in economic activity and incomes.

The marginal improvement in Irish consumer sentiment in March was broadly consistent with small gains in comparable US and Euro area indicators and somewhat better than the decline seen in the UK last month.  In the ‘States the sense of an improving jobs market has been a key driver of rising confidence.  In the Euro area, it seems the recent easing in Eurozone tensions has played the key important role.  Perhaps significantly in terms of the forces weighing on the mood of the Irish consumer, in the Netherlands, Spain and the UK where budget concerns have been to the fore of late, consumer sentiment weakened in March.

As has been the case in recent months, the details of the March survey were mixed with three of the five main components registering improvements in March and the remaining two weakening.  The improvement last month was most pronounced in those aspects of the survey relating to the Irish economy as a whole.  In terms of the economic outlook for the next twelve months, it remains the case that negative views outnumber positive views by two to one but the March reading on the economic outlook is among the healthiest readings in the past five years.  The improvement in this element in March probably owes something to a number of encouraging indicators of late both from Ireland and elsewhere.  These may have encouraged a view that economic conditions are stabilising and even improving in some areas.  We reckon a possibly even more important driver is a further easing in the threat of an Apocalyptic event in the Euro area.  This interpretation is consistent with the general tone of responses to this question that seem to suggest Irish consumers see current conditions as troubling but no longer ‘terminal’.

For the second month in a row the biggest improvement in the survey came in relation to job prospects.  The March reading was the strongest since September 2007.  Again, it remains the case that roughly half of those surveyed expect unemployment to rise in the next twelve months while just one quarter see joblessness declining.  So, there is no sense that consumers have become particularly optimistic on the jobs front.  That said, the jobs component of the sentiment survey has been improving for the past three months.  These results are consistent with a drop in numbers on the live register in each of the past months as well as the marginal improvement in employment in the final three months of 2011 reported in the recent quarterly household survey.  Of equal importance, Irish consumers are probably responding to a steady stream of new job announcements and a somewhat smaller number of layoffs through early 2012.

While both of the ‘macro’ elements of the survey posted substantial improvements in March, two of the three elements related to household finances weakened.  The exception was the forward looking assessment of personal finances which rose modestly although it remains below levels prevailing as recently as last November.  The fact that this element improved in March is slightly surprising given that energy costs were on an upward trajectory and debate about household charges and taxation intensified.  At the margin, the March reading could be consistent with recent exchequer returns which showed a somewhat stronger than expected trend in income tax and VAT.  One possible explanation might be that some consumers feel that pressures on their wages and employment prospects is set to ease as the ‘macro’ economy improves.

In contrast to the forward looking assessment, Consumers’ view of the trend in their household finances through the past twelve months weakened for the third month in four in March.  This presumably reflects the continuing pressure on household spending power from a range of sources in the past year.  The intensity of those pressures means that even though consumers were a little less gloomy about the year ahead, the final element of the survey, the buying climate, also weakened further in March.

The buying climate fell to its lowest level in seven months.  Although the sentiment index has improved somewhat of late, the details of the survey suggest there is still a pronounced lack of any ‘feel good’ among Irish consumers.  Spending power remains under substantial downward pressure while as a recent Central Bank study highlighted, net worth has fallen sharply in recent years.  Consumers’ experience of the past few years and the expectation of further significant austerity to come likely means their assessment of their ‘permanent’ income has been significantly downgraded.  As a result, both the capacity and inclination of consumers to spend continue to decline.  This isn’t surprising given the strains on household budgets but it does suggest that a modest pick-up in consumer confidence will be insufficient to deliver a sustained pick-up in consumer spending.

The March survey results suggest that while consumers detect some tentative signs of improvement in the economy as a whole, there is little sense that this will translate into a clear improvement in their personal financial circumstances anytime soon.  On this interpretation, the thinking of consumers broadly mirrors the tone of most short term forecasts for the Irish economy.  An improvement in activity driven by exports is largely offset by continuing weakness in domestic demand.  Until a notably clearer upswing in activity and employment takes hold and promises the prospect of stronger household incomes, Irish consumer sentiment and spending are likely to remain subdued.