The mood of Irish consumers brightened considerably

• Sentiment Index jumps to two year high.
• Improvement in Irish measure contrasts with declines in US and Euro area confidence.
• July reading doesn’t signal dramatic change but the coincidence of several positive influences drives Index higher. 
• Increase in Sentiment Index reflects an easing in negative responses rather than a surge in positives. So fears are fading but ‘feel good’ still in short supply.

The mood of Irish consumers brightened considerably during July. The KBC Bank Ireland/ESRI Consumer Sentiment Index rose to 67.7 from 62.3 in June. Last months reading was the strongest since June 2010 and suggests the improvement in confidence seen through the first half of 2012 is being sustained. There is no sense that current readings suggest any measure of ‘irrational exuberance’ has broken out among Irish consumers of late. Instead, we think the message of the July report is that consumers remain cautious but their worst fears continue to fade.

The July consumer sentiment reading shouldn’t be interpreted as signalling a dramatic upturn in the fortunes of Irish consumers in the past month. For most of the past six months consumers have detected increasing if still faint signs of improvement within a difficult economic environment. In these circumstances, the coincidence of a number of favorable developments (which we discuss below) during a single survey period appears to have prompted a relatively large jump in the Sentiment Index that likely exaggerates the change in the circumstances faced by Irish consumers in the past month. So, we would highlight a sustained improving trend rather than the outsized jump in the Index in July. We would also emphasize that the level of the Index at present suggests conditions remain tough for the vast majority of Irish consumers. The July 2012 reading of 67.7 is still some significant distance below the near seventeen year average of the survey which stands at 86.8. However, it is also some significant distance above the all time low of the survey of 39.6 reported in July 2008.

Consumer Sentiment in Ireland Diverges from US and Euro Area in July

The improvement in Irish consumer sentiment in July was at odds with the trend seen in comparable indicators for the US and the Euro area. US Consumer Sentiment slipped for a second successive month to its lowest reading of 2012 on concerns about the outlook for jobs and rising food prices. Euro area consumer sentiment also fell for the second month in a row, with the drop in July pushing confidence to its lowest level since August 2009. That decline was driven by a weakening economic situation and a poorer employment outlook. The drop in confidence in July was particularly evident in Germany, France and Spain as uncertainty increased about the future direction of the Euro area.

In view of the poorer trend in consumer sentiment in many other countries last month, we must look primarily to domestic factors to explain the significant rise in the Irish Sentiment Index in July. We should also note that neither Irish sporting performances nor weather would be expected to have boosted confidence in July. So, the focus is on economic and financial developments that may have provided support to sentiment of late. The July survey period saw a number of favorable developments on the economic front even though the main indicators sent fairly mixed signals on the current state of Irish economy. However, the survey period was notable for an EU summit that seemed to offer the prospect of assistance on Ireland’s bank-related debt. In addition, the ECB cut interest rates to a new historic low, exchequer data suggested Government budget targets are being met and the Troika presented another very favorable review of Ireland’s performance in meeting programme targets. These factors appear to have contributed to easing in the degree of concern felt by Irish consumers.

Improvement in Irish Consumer Sentiment Broadly Based

The details of last months survey show increases in four of the five main components. It is notable that the only element to show a weaker reading in July than in June was consumers’ assessment of the buying climate. This is not entirely surprising as there had been a sharp increase in this part of the survey in June that likely reflected a response to heavy price discounting in summer sales and, perhaps, some step-up in holiday-related outlays. These results contrast somewhat with the month to month variation in the official retail sales data of late but the broad picture painted by the Sentiment Survey continues to hint at an emerging stabilization in consumer spending, albeit at relatively low levels.

Economic Outlook Notably Higher

Perhaps surprisingly, the strongest element of the Irish Consumer Sentiment Survey in July was in relation to the outlook for the Irish economy for the next twelve months. This probably reflects the influence of the end of June EU Summit, solid Government budget data and a favourable Troika assessment. As a result, this element of the survey posted its healthiest reading in almost five years. Again, the details emphasize that consumers haven’t suddenly become particularly optimistic about Irish economic prospects. Instead, the survey suggests that the all-enveloping gloom of recent years is beginning to slowly lift. It remains the case that more consumers feel economic conditions will deteriorate rather than get better in the next twelve months. Some 28% of respondents expect the Irish economy will strengthen in the next twelve months while 40% feel it will get weaker. However, this is the smallest number of negative responses since the January 2007 survey. In contrast, the number of positive responses is the highest since August 2010. So, the turnaround in consumer sentiment is primarily coming about through a drop in the number of consumers who see things getting worse rather than a surge in those who expect things to get notably better.

These results are quite similar in tone to those seen in the KBC Bank Ireland/Chartered Accountants Ireland Summer Business Sentiment Survey released last week that suggested a turnaround in activity levels was primarily the result of fewer companies reporting a continuing decline in their business volumes in the past three months. As noted in that analysis, the current turnaround is somewhat different from a typical normal economic cycle. The sort and scale of problems that Irish consumers have faced in recent years means they are likely to remain cautious until they are very sure that both the economy and their own financial situations have moved onto a much stronger footing.

The July Sentiment Survey also recorded an improvement in consumer views in relation to the outlook for jobs although this was altogether more modest than the change in their thinking on the broader economic outlook. This smaller change might be consistent with the view that any resolution of Ireland’s bank related debt problems may take some time to feed into a better jobs climate. Again, the July survey results show Irish consumers are still relatively cautious. Roughly half expect unemployment to rise further and just under a quarter anticipate a reduction in joblessness in the next twelve months. However, a clear improvement in this element of the survey of late is suggested by a comparison of last months results with those of July 2011 that showed two thirds of consumers expecting a further worsening of unemployment and there were four times as many negative responses as positive responses.

The July survey also showed consumers were somewhat less negative about their household finances. This was not unexpected. It probably reflects the cut in ECB interest rates in early July as well as a softer trend in oil prices through the survey period. Again, however, consumers continue to take a relatively cautious position as they recognize that pressures on household spending power are expected to persist.
 

Gradual Improvement in Sentiment is Continuing

In summary, the July survey confirms a clearly improving trend in Irish consumer sentiment of late but it also emphasizes that consumers remain extremely cautious. They are slowly and, in many instances, still painfully adjusting to changed economic conditions – conditions that are now unsettling their counterparts in many other parts of the Euro area. For these reasons, the turn in Irish consumer sentiment is proving to be an extended and uneven process but it is nonetheless encouraging and suggests domestic spending may be beginning to stabilize. While the still fragile mood of Irish consumers could be derailed by poorer global conditions or renewed by domestic weakness, the July survey suggests that a gradual improvement in the circumstances of the Irish consumer is continuing to take hold.