Irish consumer sentiment posted an impressive improvement

• Sentiment index at highest level in almost eight years.

• September jump at odds with consumers’ moods across Europe.

• Views on economic outlook best since February 2006.

• Expectations for household finances boosted by talk of tax cuts.

• Current reading still points to caution on spending power but trend clearly improving.

Irish consumer sentiment posted an impressive if not entirely surprising improvement in September to its strongest level since January 2007. The KBC Bank Ireland/ESRI Consumer Sentiment Index rose to 92.8 from 87.1 in August. All the main components of the index recorded monthly gains but the main drivers were greater optimism in relation to Irish economic prospects and a related pick-up in the outlook for household finances in the coming year.

The rise in the sentiment index last month confirms the improving trend that became established through 2013 and has continued since then even if monthly outcomes have been somewhat ‘choppy’ around this trend. The broadly based rise in sentiment in September may point towards a further step-up in confidence of late in response to signs of a strengthening recovery and the anticipation of an altogether less threatening Budget next week.

Consumers More Concerned In Most Other Countries Last Month

On the basis of the trends seen in similar consumer confidence measures in other countries, it would appear that the improvement in the mood of Irish consumers in September largely reflected domestic factors. There was a significant divergence in results across the wide range of sentiment measures released in the US for September. The most comparable measure which is produced by the University of Michigan showed a modest increase that brought that index to its highest level in fifteen months but the equally prominent index produced by the Conference Board showed a surprising fall that was attributed to concerns about weaker economic conditions in the months ahead.

Euro area consumer confidence posted a fourth consecutive monthly decline in September pushing that measure to its weakest level since February. The decline was driven by poorer sentiment in regard to the economic outlook and was seen in all but three of the eighteen Euro area countries (the Netherlands and Slovakia along with Ireland reported improvements last month).

In the UK, consumer confidence also weakened in September, the second drop in three months that has to be seen in the context of a strongly rising trend since the beginning of 2013. Analysts suggested the recent weakening might reflect disappointment at the failure of a marked improvement in the traditional economic metrics to translate into notably stronger purchasing power for British consumers.

Views On Irish Economy Much Brighter

With consumer confidence readings tending to disappoint elsewhere in September, it seems likely that developments in the Irish economy prompted the sharp improvement in Irish consumer sentimentlast month. While the rise in the sentiment index was broadly based, the most notable monthly gain was in relation to the general outlook for the Irish economy. This likely reflects quite a range of favourable influences.

Through the survey period there were a number of upbeat economic commentaries, indications that an IMF loan might be refinanced on favourable terms implying a less difficult Budget, a further ratings agency upgrade of Ireland and a very large aircraft order placed by Ryanair. However, it should be noted that the survey was completed before the release of very strong GDP data just after mid–month.

Irish consumers’ views on the economic outlook were at their most positive since February 2006. Some 58% of those surveyed expect the Irish economy will improve in the next twelve months, up from 52% in August. Possibly more notable was a drop in the number anticipating a weaker economy from 18% to 11%. This suggests fears about the future have eased markedly of late notwithstanding growing concerns about prospects for the Euro area economy.

Not surprisingly, the sense that the Irish economy is on a stronger footing, allied to fairly healthy employment data, translated into an improvement in consumer thinking on the outlook for jobs. While the monthly change in this element of the survey was comparatively modest, it was sufficient to produce the strongest reading since January 2007.

Perhaps surprisingly, there was a slight drop in the share of responses envisaging a further drop in unemployment in the year ahead (from 47% to 44%) but this may in part be a correction following a sharp rise in this share in the previous two months. The key driver of the improvement in the employment component of the index was an easing in negative views on jobs (to 18% from 24%).

Again, this reading seems to paint a picture of a jobs market that is progressively recovering from the severe problems of recent years through an easing in layoff risks and solid rather than spectacular expectations in relation to new job opportunities. In this context, Irish consumers may be basing their views on subdued pay trends as much as solid new hiring.

Budget Hopes Boost Thinking On Household Finances

While thinking on Irish economic prospects was the element of the survey that saw the biggest monthly gain in September, consumers’ expectations for their household finances in the year ahead also recorded a notable improvement. Last month’s assessment of the outlook for personal finances was the strongest since May 2007. A further increase in housing prices and another easing by the ECB likely contributed to this change but our sense is that a range of comments suggesting some scope for tax cuts in the upcoming Budget was the key driver. The details suggest consumers are not anticipating dramatic giveaways - the number of positive responses to this question was largely unchanged at 19% but the number of negative responses dropped to 31% from 39%, the lowest since March 2008, implying notably less fiscal pain is expected.

The other two components of the sentiment index that relate to recent trends in household finances and spending plans also recorded increases, albeit smaller than other elements, in September. As this is only the second time in the past twelve months that all five elements of the index have increased at the same time, the survey suggests a sense of a significant change in consumer thinking last month.

Budget Now Critical To Consumer Confidence

Clearly, consumers are moving into a more positive frame of mind but it remains the case that a majority anticipate continuing pressures on their household finances. For sentiment to continue to improve would likely require both the persistence of a healthier trend in the Irish economy and some broadening of the reach of the recovery. More critically, consumers would need to see signs that this upturn will translate into an improvement in their own financial circumstances.

The October survey will be largely concluded before the upcoming Budget is delivered and our sense is that exceptionally strong GDP data and a marked step-up in commentary suggesting scope for significant tax concessions may produce another significant improvement in consumer sentiment. As a result, it could well be the November survey results that tell us how consumers’ expectations relate to an Irish economy that is improving but still facing many challenges.