Global concerns and household finances weigh on confidence.

Irish sentiment hit less than similar indicators elsewhere.

Irish households still signalling strains in household finances.

Survey suggests case for Budget boost to spending power.

Irish consumer sentiment edged fractionally lower in September but the difference between the August and September readings is so slight that it is probably fairer to think of consumer sentiment as remaining broadly unchanged last month.

Uncertainty about the global economy increased notably of late and many Irish households still feel somewhat remote from reports of a strong domestic recovery.  So, the September sentiment report probably reflects the difficulty the average consumer has in making sense of seemingly contradictory recent signals both in relation to economic prospects generally and their own financial circumstances.

The KBC Bank Ireland/ESRI consumer sentiment index weakened marginally to 100.6 in September from 101.1 in August. Changes of this magnitude are not regarded as statistically significant. With the three month moving average of the series recording a similar easing from 101.2 to 100.5, it might seem that a well-established and clearly upward trend in sentiment has been at least temporarily halted of late. We think such an outcome is entirely consistent with a notably ‘noisier’ news-flow of late that has made Irish consumers more confused and cautious. The September sentiment reading should still be regarded as fairly healthy but it also emphasises on-going concerns facing the average Irish consumer.

If the change in Irish consumer sentiment in September was marginal, it occurred against a backdrop of weaker confidence readings in a range of other countries. In the US, the most comparable measure, prepared by the University of Michigan, fell from 91.9 in August to 87.2 in September-its weakest reading in eleven months. Concerns about weakness in stock markets and renewed worries about the health of the global economy now centred on fears of a sharp slowdown in China were the main driver of the poorer September sentiment reading in the US.

In the Euro area, similar considerations perhaps augmented by the deepening migrant crisis also prompted a drop in confidence that was centred on poorer sentiment in relation to the broad economic outlook. In contrast, to their US counterparts, Euro area consumers were marginally more positive about their personal finances possibly reflecting less immediate direct concern about stock market difficulties. Completing a picture of generally nervous consumers last month, UK consumer confidence dropped to its lowest level since the end of 2013.

In light of the importance of global developments to the Irish economy, it would not have been entirely surprising if Irish consumer sentiment had registered a more significant drop than that recorded in the September index. However, the element of the survey that relates to Irish consumers’ thinking on the economic outlook actually improved slightly last month. This is not to suggest that Irish consumers are impervious to international concerns.   Instead, we think the small improvement in this element of the survey can be attributed to a sequence of very strong domestic economic indicators and positive commentaries. In particular, the strength of Irish GDP and jobs data released through the survey period likely served as an important counterweight to increased nervousness abroad.

The slight increase in confidence about the outlook for the Irish economy didn’t translate into a corresponding rise in sentiment in relation to jobs. Instead, there was a marginal weakening in this element of the survey in September.  Perhaps this reflects a view that a less certain Global environment may lead to a more conservative approach to job creation. It might also be argued that this result is consistent with some signs of an easing in the pace of decline in joblessness of late. CSO data released earlier this week indicate that Irish unemployment fell by 800   between August and September compared to an average monthly drop of 2,340 in the past year. Finally, it should be noted that it remains the case that Irish consumers remain largely of the opinion that unemployment will continue to decline in the next twelve months, with 47% of respondents expecting a further fall compared to 24% that envisage a rise in joblessness.

In the light of heightened global uncertainty, it is not entirely surprising that the ‘macro’ elements of the Irish consumer sentiment survey were fractionally weaker in September. However, the more ‘micro’ oriented elements of the survey were more influential in producing the small decline in the overall sentiment index last month. In September, consumers downgraded both their assessment of how their personal finances had evolved in the past twelve months and how they expect them to develop over the next twelve months.

This poorer assessment of household finances may be a reflex response to increased international concerns although one might have expected this would have been associated with at least a corresponding markdown of the economic outlook. Moreover, this combination contrasts with the more intuitive divergence in the Euro area confidence indicator where a weaker economic assessment contrasted with resilience in the household finances element of that survey.

Alternatively, the more downbeat assessment of personal finances by Irish consumers may simply reflect a continuing gap between strong economic indicators and what for many continues to be a struggle to make ends meet. In this context, just 20% of consumers reported an improvement in their household finances in the past twelve months, not markedly different from the 16% who gave a positive response to this question in the September 2014 survey. While the number reporting a deterioration eased to 31% from 40% a year ago, these responses still suggest a broadly based sense that thus far the upturn has been for other people.

Perhaps surprisingly, given the general tone of the Sentiment survey in September, consumers’ assessment of the buying climate improved slightly last month although this probably reflects a correction of comparatively weak readings in this element of the survey in the past couple of months. Some 34% of consumers felt that now was a good time to contemplate major purchases- exactly the same number gave the same response a year ago in the September 2014 survey. Although consumer spending has moved onto a clearly stronger trajectory of late, conditions vary widely at both a regional and sectoral level. While aggregate consumer spending was 2.8% higher in the second quarter of 2015 than a year earlier, this rate of increase has to be seen in the context of a 3.0% rise in numbers at work over the same period. So, there is little sense of a broadly based surge in consumer spending.

It is understandable that there might be concerns about the merits of injecting a significant fiscal stimulus into an Irish economy set to grow by around 6% this year. However, the upswing has to be seen in the context of the downturn that preceded it and its traumatic effect on the financial circumstances of Irish households.

It is difficult to argue that there isn’t still a significant amount of slack and strains in the Irish economy and notable differences in the strength and spread of the upturn within the economy that would argue for some supportive measures. Moreover, in the context of a cumulative fiscal adjustment of 17% of GDP through the crisis, a proposed package of about €1.5billion or 0.7% of GDP in the upcoming Budget in tandem with further significant progress in reducing both the Government deficit and debt would not seem imprudent. As a neutral budget would allow spending/tax adjustment s of 0.3/0.4% of GDP, the marginally higher measures proposed can’t be considered to be a ‘giveaway’.  In any event, the application of EU fiscal rules should prevent any threat that this would set Ireland on a slippery slope in terms of future Budget largesse.

The sentiment survey suggests that there might be significant merit in Budget measures that put household finances onto a somewhat healthier trajectory and, in the process, broaden the basis of the recovery. The tricky task is strike a balance that supports broadly felt growth without fostering unrealistic expectations. The September consumer sentiment results might suggest that this may require a Budget day package of at least the proposed €1.5 billion already signalled by the Government.



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.