Sentiment falls for a second successive quarter as ‘macro’ uncertainty increases

Current sentiment levels point towards a confident but more cautious consumer

Brexit likely an influence but broader concerns also emerging

Consumers in the capital more cautious particularly in relation to jobs

We think industrial disputes and increased global uncertainty likely contributed

Household finances resilient but Dublin consumers may be focussed on higher living costs

Buying intentions improve as pent-up demand and intense retailing competition underpin spending

The regional breakdown of consumer sentiment data shows a second quarterly drop both in Dublin and across the rest of Ireland in the 3rd quarter of 2016. As was the case in the previous quarter, consumer sentiment fell faster in the capital than elsewhere in the country in the third quarter of 2016.

Current levels of the regional sentiment indices, still suggest the mood of consumers in the Dublin and the rest of Ireland is reasonably positive but the trend seen through the past couple of quarters as depicted in Diagram 1 below also hints at notably increased nervousness of late.

It seems likely that heightened uncertainty in the wake of the UK referendum vote to leave the EU was an important influence on the weaker sentiment readings both in Dublin and across the rest of the country in the third quarter but this wouldn’t seem to explain adequately the notably sharper decline reported in the capital than elsewhere.

It could be that consumers in Dublin are more fearful than their counterparts across the rest of the country about the possible impact of ‘Brexit’ on their personal financial circumstances but this would seem slightly surprising given the diversity of economic activities within the capital.

Another possibility is that Dublin consumers see Brexit as yet another symptom of a notably less certain economic future. To the extent the UK vote to leave the EU is a reflection of a less cohesive global economic framework, it may be that Dublin consumers are more concerned about broader risks to the multinational sector that is centred on the capital and the knock-on impact on themselves as workers and consumers of such developments.

It should be noted that consumer sentiment also slipped more in Dublin than in the rest of Ireland in the previous quarter. This might suggest that the nature and current position of the recovery in Dublin make it more sensitive to emerging sources of bad news. Developments, possibly in relation to the jobs and property markets, may be proceeding in a manner that resonated more strongly with consumers in Dublin than elsewhere. 

As diagram 2 below illustrates, thinking in relation to the outlook for the Irish economy in the coming twelve months developed in a broadly similar fashion in Dublin and elsewhere in the third quarter, with a marginally larger decline in sentiment being seen outside the capital.

 As the diagram indicates, a pullback in sentiment in relation to economic prospects has been underway since early 2015 in the case of Dublin consumers and since the turn of the year for consumers in the rest of Ireland. This hints at a continuing sense of detachment from or perhaps a distrust of a steady stream of positive economic news as signalled by most conventional economic indicators.

Diagram 2 also indicates that sentiment in relation to economic prospects remains somewhat stronger in Dublin than elsewhere, a verdict that likely reflects the greater maturity of the upswing in the capital and wider diversity of the activities bolstering it. If the weakening of sentiment in the third quarter had been solely due to Brexit, we would have expected a more dramatic deterioration in this element of the survey in the most recent quarter.    

The most notable weakening in the third quarter was in relation to Dublin consumers views of job prospects. As diagram 3 shows, sentiment in relation to employment remains more positive in the capital than elsewhere but there was a sharp reassessment of the outlook in the latest survey period. A combination of factors may go some way to explaining this result.

One consideration is that while the jobs market has been comparatively strong in Dublin in recent years, buoyant demand for labour has prompted a sharp increase in labour supply. This is seen in diagram 4 below which reveals a somewhat surprising rise in unemployment in Dublin in the second quarter of this year in contrast to a continuing decline across the rest of the country. The second quarter also saw a light easing in the pace of jobs growth in the capital in contrast to a pick-up elsewhere.

While this element of the survey asks for opinions on the outlook for unemployment, we think the answerers given should be interpreted as a broad measure of consumer thinking on jobs market conditions rather than simply a forecast of the unemployment rate in a year’s time.  Viewed from this perspective, recent weaker responses to this element of the survey may owe something to a step-up in industrial relations disputes of late, particularly in the capital as evidenced by strikes at Luas and Dublin Bus. In turn, these problems, allied to relatively limited increases in earnings, may paint a picture of a jobs market that is not as favourable from a consumer perspective as the trend in the unemployment rate would suggest.

The 3rd quarter results show little change in ‘micro’ elements of the survey related to consumers’ own financial circumstances in contrast to the clear weakening in relation to ‘macro’ considerations such as general economic prospects or the outlook for jobs. That said, there is a slight softening in Dublin consumers’ expectations for their household finances through the next twelve months.

As diagram 5 indicates, the recovery in expectations for household finances has been much more pronounced outside the capital in recent years. Importantly, this question asks about consumers’ general financial circumstances rather than the trend in their incomes.

We think several factors might explain the recent divergence. First of all, the improvement in the public finances and the related turn from austerity measures to an element of fiscal stimulus might be expected to give more of a boost to consumers outside the capital because of the greater visibility of the public purse in influencing economic conditions outside Dublin. The prospect of notable constraints on public spending may have contributed to some pull-back in this element of the survey in recent quarters.   

We also think that Dublin consumers may have been more conscious of increased living costs particularly in relation to housing than their counterparts across the rest of Ireland of late. In circumstances where income increases have been modest, the burden of higher shelter costs or longer commute times may be weighing on responses to this question. Finally, we think increased ‘macro’ uncertainty may be leading to an associated downgrade of future income gains.      

While the broad message of the survey is one of a more cautious Irish consumer, the fact that the current levels of the survey both for consumers in Dublin and elsewhere still point to a reasonably positive assessment of current economic circumstances is underlined by an improvement in the buying climate in the 3rd quarter. As diagram 6 indicates, this improvement was more pronounced in the case of consumers outside the capital, an outturn that is consistent with other elements of the survey.  Again, it may hint at pressures on living costs that limit the discretionary spending power of some Dublin consumers.

We think pent-up demand, a very competitive retailing environment and perhaps, some disinflationary impulse from recent Sterling weakness could all have contributed to this result. This suggests that consumer spending will remain a source of positive momentum for the Irish economy through the remainder of 2016. However, diagram 6 also emphasises a somewhat erratic trend in purchasing intentions. This pattern, together with the concerns expressed in ‘macro’ elements of the survey, suggests that the persistence of strong gains in consumer spending can’t be taken for granted for 2017.
 
 

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.