August was a relatively quiet month for Irish consumer sentimen

• Slight pullback in sentiment index reflects weaker buying intentions as summer sales end and back to school commitments loom large.

• Macro views unchanged. Consumers expect tough Budget but may be unsure precisely how severe it will be.

• Low inflation and stabilising property values may be helping household finances and easing ‘feel bad’ factor.

• August data consistent with a consumer in waiting mode. Will signs of economic recovery or Budget pain dominate sentiment to end year?

August was a relatively quiet month for Irish consumer sentiment with no major change in consumer thinking on the broad economic outlook or their personal finances. A small fall in the sentiment index reflected the usual pullback in consumers’ assessment of the buying climate that followed the end of summer sales and the start of back to school spending.

The KBC Bank Ireland/ESRI Consumer Sentiment Index fell to 66.8 from 68.2 in July. However, the underlying trend as indicated by the three month moving average of the survey improved to 68.5 from 66.7. These results suggest no marked change in the mood of Irish consumers of late. The current level of the index remains some distance below the near 18 year survey average of 85.4. That said, recent readings represent some improvement from the crisis period average of 59.2 (2007 to date). While the sentiment index suggests Irish consumers are still cautious, they seem a little less fearful recently than through most of the crisis period. As we noted previously, the small improvement in the trend in sentiment of late largely reflects a drop in negative responses rather than a pickup in positive responses. This seems consistent with an easing in fears rather than a direct personal experience of notably healthier economic or financial conditions.

The slight softening in Irish consumer sentiment in August occurred against a backdrop of mixed readings from comparable indicators in other countries. In the US there were contrasting results for the two main barometers of confidence but both show a generally notably healthier trend in recent months that mirrors an improvement in the jobs market and US house prices. Eurozone consumer confidence improved slightly but remains weak by historical standards and this month’s outturn showed contrasting developments across countries. A further pointer towards ‘crosscurrents’ in regard to consumer thinking was the divergence seen between improving consumer confidence in the EU commissions sentiment measure for Germany and  a drop in the most closely watched domestic measure that hints at a measure of caution among German consumers possibly due to the approaching election in that country. In the UK, consumer sentiment rose to a five year high. Again, this chimes with stronger spending and an improving property market although more nebulous influences such as a new royal baby and some international sporting successes may also have contributed to an improved national mood in our nearest neighbours of late.

The details of the August consumer sentiment survey for Ireland were mixed. Three of the five survey elements were effectively unchanged from July, another—the buying climate—recorded a significant decline while the remaining element, that relates to recent trends in household finances, saw a modest increase. The weakening in the buying climate is not surprising, particularly as this part of the survey posted a three year high in July. We think spending related to the fine weather, significant discounting in summer sales and the arrival of the new 132 motor registration plate all contributed to strong spending in July (as yesterday’s exceptional retail sales data for July testify). However, the August sentiment data suggest the underlying trend in Irish consumer spending remains weak. With summer sales over and back to school demands on household budgets looming large for many families, it is not surprising that consumers signalled a decline in their appetite for big ticket purchases in August. Interestingly, the drop in this element of the survey from July largely reflected a fall in the number of positive replies rather than a pick-up in negative responses. This hints that the change in the buying climate in August at least partly reflects ongoing ‘guerrilla warfare’ on the part of Irish consumers where substantial discounts or unusual circumstances such as exceptional weather are needed if spending is to be boosted. This would imply that the near term trend in household spending may remain restrained. However, the pattern of responses in August is probably less threatening than if the decline in the buying climate had been driven by an increase in negative responses as that would hint at increased stresses on household finances of late.

Both macro elements of the consumer sentiment survey posted effectively unchanged readings in August. In each case, negative responses continue to outnumber positives by a significant margin but a modestly improving trend has been in place since the end of 2011. Macroeconomic news was relatively limited through the survey period and though there were several new job announcements, it seems that some high profile job losses through the summer have taken a toll on consumer views of the Irish jobs market.

Consumers took a largely unchanged view of the outlook for their household finances in the August survey. There was quite a lot of debate about the likely severity of Budget 2014 through the survey period but for the most part this discussion has been couched in ‘macro’ terms. For most consumers the precise implications for their family finances of whether the adjustment is closer to €3.1bn or €2.1bn are probably still unclear. That said, the fact that four times as many consumers expect their household financial position to weaken in the next twelve months as expect it to improve (just under half of those surveyed compared to just one in eight) suggests that the average Irish consumer is braced for another difficult Budget.

A somewhat surprising aspect of the August sentiment survey was a slightly less negative assessment of the trend in household finances through the past twelve months. This was prompted by an easing in the number reporting a deterioration in their household finances rather than a rise in the number of those indicating an improvement. With 58% of responses negative against just 8% positive, the broad picture is clearly one of ongoing pressure on household finances. Our judgement is that the improvement in the jobs market of late has not fed through to this element of the survey because real wages are still falling and Budget measures are weighing on spending power. However, we think the August results may be picking up some positive impact from signs of stabilisation in the residential property market of late as well as persistently low consumer price inflation. This easing in the ‘feel bad’ factor may not lead to any marked improvement in  consumer spending but it might encourage a little more confidence in the sustainability of household financial situations and possibly encourage some increase in property transactions.

Overall, the August sentiment data suggest no major change in thinking among Irish consumers of late. At the margin, a modestly positive trend looks to be continuing. However, a major positive driver of confidence is still lacking as consumers are not seeing any marked improvement in their personal circumstances. In turn, this suggests that consumer sentiment through the balance of 2013 will be significantly influenced by the design, details and possibly even the delivery of the upcoming Budget. A Budget that encourages the view that a clear turn in the economy entailing improving household finances is in sight could boost confidence further. A Budget that delivers unexpectedly large pain could have an outsized negative effect on sentiment and spending.