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Irish consumers ended 2013 in a notably more positive mood
• Sentiment index at best level since June 2007.
• Fears continue to ease even if caution still prevails.
• ‘Bailout’ exit may have boosted thinking on economy and household finances.
• Layoffs restrain hopes for jobs market.
• 2014 to be a challenging year for sentiment as hopes for recovery build.
Irish consumers ended 2013 in a notably more positive mood than they were twelve months earlier. A growing sense that the economy has moved onto a healthier trajectory, that more jobs are being created than lost and that significant pressures on household finances may be set to ease somewhat are encouraging a notably less fearful view of the economic climate. This is not to suggest that Irish consumers are in buoyant mood. Consumer sentiment is still somewhat below its long term average. However, the December 2013 reading was the strongest in 6 ½ years. So, confidence seems to be on the mend after what has been a very traumatic period for the Irish economy.
The KBC Bank Ireland/ESRI consumer sentiment index rose to 79.8 in December from 71.0 in November. Some sense of the extent of improvement in confidence through the past year is suggested by a comparison of last month’s figure with the 49.8 reading recorded in December 2012. However, as we noted last month, the monthly pattern has been very uneven with seven of the past twelve months reporting gains and the remaining five registering declines. The December survey confirms that a positive trend is becoming established.
We think the ‘saw-tooth’ pattern seen in the sentiment data through the past year reflects two related factors. First of all, this is not a normal global recovery. As a result, the average Irish consumer continues to be buffeted by an array of opposing and frequently bewildering economic developments. Second, Irish consumer thinking is undoubtedly shaped by some very painful experiences through the recent crisis. This will tend to weigh on sentiment for some considerable time to come. For these reasons, the emergence of a clearly healthier trend in Irish consumer confidence seen through the past year represents a very encouraging development.
Is The Mood Of Irish Consumers Notably Different To Other Countries?
The gain in the Irish consumer sentiment index in December coincided with mixed results in similar indicators in other countries. We examine these developments in a little more detail than usual to see what lessons they might hold for the Irish consumer.
In the States, the closest corresponding measure (produced by the University of Michigan) showed a substantial improvement following some relatively weak readings in previous months. With recent uncertainty about Government shutdowns and the possibility of default now removed, US consumers shifted attention to a number of more positive recent developments.Healthier jobs growth, rising house prices and stock markets as well as lower petrol prices all Irish Consumers End 2013 In A More Positive Mood15 January 2014 3 contributed to a mood of more than just seasonal cheer.
Euro area consumers were also more upbeat in December with the EU Commission confidence index registering a reasonable monthly rise to reach both its healthiest level since July 2011 and a reading consistent with its long term average. The monthly improvement was more notable among consumers in economies that have performed poorly of late, perhaps reflecting a measure of optimism that the coming year will see some easing in problems in these countries.
In contrast to US and Euro area developments, UK consumers reported a third consecutive monthly weakening in sentiment. With most recent commentary on the UK economy focussing on stronger than expected conditions, this may seem somewhat surprising. Our hunch is that it is partly a correction after very strong readings earlier in the year. We also think that comparatively high UK inflation and low nominal income growth may make many British consumers take the view that they are not sharing in the benefits of the emerging economic upswing.
Our sense is that the upswing in Irish consumer sentiment through 2013 is something of a ‘relief rally’ as consumers recognised a swing from a balance of negative to positive developments in the Irish economy during the past year. In that sense, it is somewhat similar to the turn in Euro area confidence of late. The improvement in sentiment in the ‘States also reflects signs of healthier economic conditions but we feel that they also stem from improvements more directly related to household financial circumstances such as increases in asset prices and declining energy bills. On this interpretation, recent softness in UK consumer sentiment might be understood as reflecting a disappointment with still strained household finances.
These considerations would suggest it is important that Irish consumers can sustain some realistic expectations that a stronger Irish economy will translate into a tangible improvement in their financial circumstances within a reasonable timeframe. However, avoiding excessive expectations about how quickly and how sharply this improvement might come may be even more important at this early stage of an economic turn.
Positive Views on Irish Economy Now Dominate
The monthly rise in Irish consumer sentiment in December was seen across four of the five main elements of the survey, implying a broadly based improvement in consumer thinking.Strong confidence gains were recorded in consumers’ views of the outlook for the Irish economy in the coming year. The survey period coincided with a significant media focus on Ireland’s exit from its EU/IMF assistance programme. This likely emphasised the comparatively positive nature of recent economic developments. As a result, 51 per cent of respondents said they expect the Irish economy to improve in the coming year compared to just 21 per cent who predict deterioration. This represents a markedly more favourable outlook than has been the norm for the survey.
For most of the past eight years a strong majority of consumers envisaged a continuing worsening of Irish economic conditions. Indeed, in the December 2012 survey, 53 per cent of consumers were negative on the economic outlook against just 20 per cent who were positive. So, the recent shift to a majority of positive responses points to a markedly more encouraging assessment of Irish economic prospects of late.
Job Loss Announcements Have Some Impact
Perhaps surprisingly in the light of more upbeat views on the economy, sentiment in regard to the jobs market was unchanged in the December survey. In part, this reflects the fact that there was a sharp increase in this element of the survey in November that resulted in a net positive balance in regard to job prospects for the first time since December 2004. Last month’s result could also have been influenced by a number of high profile job losses during the survey period. While consumers also saw several new job announcements and a further drop in numbers on the live register, the likelihood is that with the economic upturn still tentative and unemployment above 12%, any news that jobs are being lost - often on a significant scale in well known companies, can have a marked impact on sentiment.
Is the Worst Over For Household Finances?
The December survey also saw a notable improvement in thinking in relation to consumers’ own financial circumstances. To an extent this may reflect the fading of media focus on the painful consequences of Budget 2014. The vast bulk of survey responses were gathered before Finance Minister Noonan’s interview in which the possibility of tax cuts was raised. However, the general tone of coverage of Ireland’s exit from the bailout throughout the survey period emphasised that the worst was over in terms of austerity-related adjustments to household finances. This is likely to have fed a less nervous judgement on the outlook for consumers spending power.
We also think continuing evidence of a turn in residential property prices may have influenced the views of some respondents in relation to their financial well-being. Given that the stock of householders is likely to exceed that of those planning immediate house purchases, it might be expected that house prices and sentiment would be positively related. However, it should be noted that in contrast to results for ‘macro’ related questions in the survey, the balance of responses to questions on household finances is still overwhelmingly negative; in spite of the improvement last month, the December survey showed 43% of consumers expect their household finances to deteriorate in 2014 whereas just 17% anticipate an improvement.
The December survey also saw some limited retracement of the drop in the buying climate in November but these results still point at a relatively restrained trend in Christmas spending. In broad terms, this is consistent with the picture emerging from other elements of the survey that suggests consumers are notably less fearful about the broad economic outlook but the encouraging ‘macro’ news they hear has yet to translate into any clear improvement in their personal finances. In turn, this points to the prospect that the emerging turn in domestic demand in the Irish economy could be uneven and extended.