Pullback from nine year survey high in January not entirely unexpected.

Underlying trend in sentiment still positive, reflecting optimism on jobs and Irish economy.

Irish Consumers not seeing a straight line improvement in their personal circumstances.

Slight weakening in outlook for household finances hints at continuing pressures in this area.

Irish consumer sentiment weakened somewhat in February following the sharp rise in January to a nine year high, according to the KBC Bank Ireland/ESRI Consumer Sentiment Index. The pullback last month is disappointing but not entirely unexpected. Most years, the sentiment index tends to soften once post-Christmas festivities end and related bills arrive. This seasonal influence played some role in the drop in confidence seen last month. However, there were also broader signs of retracement in the February reading.
The KBC Bank Ireland/ESRI Consumer Sentiment Index declined to 96.1 in February from 101.1 in January, reversing just under half of that month’s gains. Our sense is that the underlying trend in Irish consumer sentiment remains solidly positive. The February reading is more than ten points higher than a year ago and the second highest in nine years.

Around this improving trend, however, the sentiment index is moving upward at an uneven pace; through the past year there have only been two occasions when there have been monthly gains in two consecutive months and no sequence of three successive increases. We think this reflects a still uncertain global economic environment and ongoing pressures on household finances that mean Irish consumers remain nervous and restrained.

Our sense is that the pull-back in Irish consumer sentiment last month is largely domestic in nature but mixed readings from confidence measures elsewhere suggest the global economic backdrop is still a source of some uncertainty to consumers here as well as their counterparts in other countries.

The weakening in Irish consumer sentiment in February mirrored a similar drop in the comparable U.S. sentiment measure which declined from an eleven year peak posted in January. While the latter may owe something to continuing weakness in wage growth, some analysts are also attributing the disappointing February result to particularly severe weather of late in parts of the ‘States. More generally, a slight retracement from January’s multi-year high may the persistence of contrasting influences on the fortunes of American households even though the economic upswing in the ‘States is reasonably mature at this stage.
The Euro area consumer confidence indicator showed a third monthly improvement in February but the details suggest nearly half of the countries in the single currency area reported weaker confidence readings.  UK consumers reported a broadly unchanged level of confidence in February as greater optimism about the British economy offset increased concerns about household finances.

Four of the five main elements of the Irish consumer sentiment survey weakened month on month in February. The exception was the jobs component of the survey which posted its strongest reading since January 2007. Through the survey period there was quite a number of new job announcements and numbers on the live register fell for a 22^nd consecutive month.

As has been the case with many elements of the survey through the past couple of years, the improvement in the jobs component last month was driven primarily by an easing in fears rather than markedly greater optimism taking hold. Some 48% of consumers surveyed in February expect the Irish jobs market to improve further in the next twelve months, little changed from the January reading. However, the number that envisages a deterioration slipped from 21% to 15%.

As most of the macroeconomic news through the survey period was broadly positive, it may seem slightly surprising that consumers were a little less upbeat about the outlook for the Irish economy over the next twelve months. This may owe something to renewed concerns about the Outlook for the Euro area in the wake of the latest travails in Greece. An IMF assessment noting continuing vulnerabilities in the Irish economy and a draft EU Commission report highlighting concerns in relation to water charges may also have weighed on sentiment. While positive views on the Irish economic outlook slipped five percentage points to 58% of those surveyed and negative views increased by a similar amount to 16%, this remains the strongest element of the consumer sentiment survey by some distance.

It is often the case that those elements of the survey related to household finances weaken in February as consumers rein in spending after significant outgoings over Christmas and New Year. While the buying climate did correct marginally, it remains at levels that hint at some increased inclination to spend through 2015.

After a particularly encouraging assessment of the outlook for household finances in January that saw positive responses outnumber negatives for the first time since May 2007, there was a clear correction in this element in the February results. Positive responses dropped from 30% of those surveyed to 22% while negative responses edged up from 24% to 26%. While disappointing after the January reading, these results are still very strong relative to other responses to this element of the survey in recent years.

Our sense is that the weaker February assessment of the outlook for household finances is primarily a reflection of the fact that Irish consumers are not experiencing a straight line recovery where each month represents a clear and progressive improvement in their circumstances. It may also be the case that the arrival of New Year bills dented start of year optimism somewhat. A firming in oil prices of late might also have played some part.

At the margin, it might also be speculated that a judgement that property values and access to lending could both be adversely affected by new Central Bank regulations on loan to value and loan to income ratios (whose final details were announced during the survey period) could also have had some impact on this element of the survey. Traditionally, the sentiment survey has shown a positive relation with property values reflecting the importance of housing in Irish household wealth. With access to lending expected to be curtailed by these measures, it wouldn’t be entirely surprising if this announcement hadn’t some impact on the February results. That said, the outlook for household finances is now significantly higher than when Central Bank proposals were first mooted back in October 2014. So, we don’t regard this as the dominant influence on consumer thinking.



This non-exhaustive information is based on short-term forecasts for expected developments in the economy and financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalised investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a judgment as of the date of the report and are subject to change without notice.