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The rise in the index suggests sentiment remains on a generally improving trend
• July consumer sentiment reading bounces back to 7 year high.
• Key drivers are stronger growth data and related hopes for a gentler Budget.
• Consumers more upbeat on economy but still worried about household finances.
• Consumers not seeing clear improvement in their own circumstances.
• Volatile sentiment readings of late highlight continuing uncertainty about outlook.
We would draw three conclusions from the July consumer sentiment results. First of all, the rise in the index suggests sentiment remains on a generally improving trend. Second, the sharp rise in the sentiment survey last month continues the notably more volatile pattern seen of late as consumers struggle to make sense of strongly conflicting signals on the health of the recovery and what that might mean for their personal finances. Third, the confusion felt by consumers and signalled by ‘choppy’ movements in the sentiment index seems to be the result of a disconnect between increasingly upbeat commentary on the current state of the Irish economy and broadly based and continuing pressures on their household finances. For many, the recovery they are hearing about is not one they are seeing in their own circumstances.
The KBC/ESRI Consumer Sentiment Index rose to 89.4 in July from 81.1 in June. The sharp drop seen in the survey in May has now been more than fully reversed. As a result, the July reading is the strongest since January 2007. It also lies slightly above the long term average of 85.1 (the series stretches back to February 1996).
The improvement in the mood of Irish consumers in July was at odds with the results of similar measures of consumer confidence in a range of other countries. In the US, the most comparable indicator slipped modestly if unexpectedly. However, some element of confusion was suggested by more upbeat readings from a number of similar surveys. In the Euro area, there was a broadly based weakening of consumer confidence presumably reflecting concerns about a recovery that is uneven and vulnerable to a deteriorating situation in the Ukraine. In the UK, confidence fell for the first time in six months, an outturn that may be a correction and could owe something to persistently below inflation increases in pay.
In the light of relatively weak readings elsewhere, we must look to domestic developments to explain the jump in the Irish Consumer Sentiment Index in July. The composition of the survey gains suggest the main driver was likely a sequence of encouraging reports on the Irish economy and developments in the jobs and property markets during the survey period. The strongest improvements in sentiment in July related to consumers’ assessments of the outlook for the Irish economy and related prospects for employment.
Irish consumers’ views on the economy last month were at their most positive since December 2006 and as such represent quite a change from the notably more concerned reading reported for June. Irish Consumer Sentiment Underpinned By Improving Economy13 August 2014 3 Positive views increased from 43% of respondents to 54% whereas negative views dropped from 25% to 13%. This represents a substantial change and probably reflects the release of notably stronger than expected economic growth data for the first quarter allied to positive revisions to previous estimates.
For the average Irish consumer, the vagaries of the Irish National Accounts are rarely a primary concern. However, the clear message that growth is now set on a solid trajectory and this should imply a less severe Budget in October clearly struck a chord. (Incidentally, the July reading also suggests that consumers didn’t think the difficulties surrounding the Garth Brooks Croke Park concerts would have the cataclysmic effect that some reports suggested might ensue!).
Consumers were also notably more upbeat in their thinking on job prospects in July. The survey period saw a range of new job announcements as well as a further drop in numbers on the live register. We think the more positive economic outlook also affected responses to this question. That said, consumers are notably more cautious about the jobs market than the broader economic outlook. Positive responses outnumber negatives by a ratio of 4 to 1 in respect of the economic outlook compared to a 2 to 1 ratio in respect of employment.
While consumer thinking on the ‘macro’ environment improved markedly in July, views on ‘micro’ conditions continue to show signs of concern. In contrast to responses to ‘macro’ questions, there continues to be a majority of negative responses to questions on household finances. In the July survey there was a small improvement in consumers’ views as to how their personal finances had developed over the past twelve months and only a fractional gain in expectations for the next twelve months. Although broadly similar influences might be expected to influence thinking on past and prospective trends in household finances, our sense is that different factors drove responses to these two questions in the July survey.
Our judgement is that various signs of an improvement in the housing market together with price discounting in the summer sales likely combined to make consumers a little less negative about their financial experience of late. These elements may also have driven a modest improvement in the buying climate in July as would the introduction of the new 14-2 car registration plate.
In contrast, most recent finance-related discussion about the coming twelve months has centred on the likely scale of adjustment Irish Consumer Sentiment Underpinned By Improving Economy13 August 2014 4 needed in the upcoming Budget. Although strong growth data and better than envisaged exchequer returns through the July survey period hinted that less austerity might be necessary, recommendations from the Fiscal council, the IMF and the EU commission all argued for measures totalling €2bn or more.
In these circumstances, it is not entirely surprising that consumers felt that their personal finances would remain under pressure in the year ahead. As a result, in spite of a marginal improvement in July, three times as many consumers expect a further weakening of their household finances in the next twelve months as anticipate an improvement (48% against 15% of respondents).
This result highlights the extent to which consumers feel divorced from an improvement in Irish economic conditions that for the most part they are reading or hearing about rather than experiencing at first hand. While consumers shared in the pain of the downturn, many may feel the recovery seems to be happening to other people. It is common to hear about a ‘two speed’ recovery that distinguishes the strength of various business sectors. Instead, we might describe present conditions in terms of a ‘two story’ Irish economy in which some consumers are experiencing a clear improvement in their living standards which the remainder are hearing about while they struggle to make ends meet.
To support a still tentative and narrowly based upturn in domestic demand, the key task for Budget 2015 is to strike a balance between achieving promised goals for the Public finances and supporting expectations of a sustainable and more broadly based improvement in living standards. In the next few months, the behaviour of the consumer sentiment survey may shed some light as to how optimistic, pessimistic or simply confused Irish consumers are in this regard.