It's your Mortgage Day!
Sentiment slips to lowest level since August 2013
Similar Brexit worries also weigh on confidence in UK and Euro area
‘No deal’ Brexit Budget 2020 also seems to have weighed on Irish consumers
Weakest October readings in areas related to household finances rather than macroeconomy
‘Embedded uncertainty’ weighing on consumer spending and restraining retail sales …
But Sterling weakness is providing some temporary offset by supporting Irish consumers’ spending power
Four of the five components of the Irish consumer sentiment index weakened in October, the exception being an effectively unchanged assessment of the jobs market. Unusually, the most pronounced weakness in the October results was in those areas of the survey focussed on household finances and spending rather than broader macroeconomic conditions. For most of the past three years, the drop in Irish consumer confidence has been led by sharp declines in ‘macro’ elements of the sentiment survey. This reflects both the nature of Brexit risks and the reality of improving conditions for many households as recovery took hold in the Irish economy.
It may be that the lack of broadly based adjustments to welfare rates and income taxes in budget 2020 forcefully brought home both how wide the channels through which Brexit difficulties might be felt and how significant they might be. So, even if consumers avoid major ‘direct hits’ to their income or employment from Brexit, their household finances could be adversely affected through taxation and/or welfare changes because of the impact of Brexit on the Public finances.
For the average Irish consumer, Brexit concerns have primarily focussed on trade and travel. The implications for the public finances and, as a result, on household finances, are unlikely to have been a key consideration. Unfortunately, the collective memory of Irish consumers has been seared by a sense of how vulnerable the public finances can be, how such vulnerabilities tend to be hugely underestimated initially and how painful the remedies to address such vulnerabilities can be. For these reasons, the message of Budget 2020 that Brexit might put the public finances on a more strained course may have struck a worrisome note with some Irish consumers.
A notable weakening of household finances and spending plans in the October survey could also be simply an indication of ongoing pressure on many households’ finances that mean even modest ‘giveaways’ are critical to making ends meet. This interpretation would be consistent with responses to a special question asked in the September survey that found 72% of consumers felt Budget day adjustments to tax and social welfare rates were important to their personal financial circumstances.
The improved prospect of late that a ‘no deal’ Brexit can be avoided may boost the November Sentiment reading. However, with political uncertainty in the UK elevated and an increasing likelihood that the permanent agreement between the UK and EU will entail a greater degree of dislocation, it seems likely that Brexit will cast a shadow on Irish consumer sentiment for some time to come..
The key question is whether that ‘embedded uncertainty’ will continue to weigh on Irish consumer spending in the manner that it has since the Brexit referendum. Over the three years between mid-2016 and mid-2019, growth in household spending lagged household income by just over 1% per annum whereas, prior to the referendum, spending typically outpaced income growth by a broadly similar amount.
In the same vein, while Irish retail sales in September 2019 , the recent trend is not entirely inconsistent with recent sentiment data. The diagram below shows that the volume of retail sales (excluding cars) rose by a robust 4.2% y/y in the third quarter. However, the value of sales (excluding cars) rose by a more muted 1.8%. When we adjust the latter to take account of population growth, we find the average retail spend per person increased by just 0.5% y/y in the third quarter and if we use overall retail sales (including cars) the year on year change in retail spend per person turns negative , dropping 2.2% y/y.
Whereas risks are large and one-sided from a consumer perspective, this has to be weighed against the current reality of healthy gains in employment and improving incomes. So, spending hasn’t stopped but it is notably slower than it might otherwise be. Understandably, when sentiment sours, spending on big ticket items such as cars and property is likely to be notably more affected than day to day outlays. Interestingly, while Brexit may be making Irish consumers more cautious, it should also be noted that it is also increasing their spending power as weakness in Sterling and more intense retailing competition have resulted in retail prices in Q3 2019 being 2.3% lower than a year earlier. However, unless Sterling suffers persistent declines, the boost to spending power may wane while consumers are fearful that Brexit problems will intensify.
The KBC Consumer Sentiment Survey is a monthly survey of a nationally representative sample of 1,000 adults. Since May 2019, Core Research have undertaken the survey administration and data collection for the KBC Bank Ireland Consumer Sentiment Survey.