Irish consumer sentiment improved modestly in October

• Modest increase pushes sentiment index to strongest level since June 2007.

• Brighter economic outlook boosts buying climate.

• Consumers still cautious about household finances ahead of Budget.

• Gradual easing in fears emerging but spending power still under pressure.

Irish consumer sentiment improved modestly in October. Coming after a sharp rise in September, these data point towards a clearly brighter mood among Irish consumers of late. Although they remain cautious about their household finances, consumers seem less fearful about the outlook for the Irish economy. Encouragingly, the October survey also hints that this may make them a little more willing to spend.

The KBC Bank Ireland/ESRI Consumer Sentiment Index improved to 76.2 in October from 73.1 in September. This month’s reading is the strongest since June 2007. However, it is still somewhat below the historic average of the seventeen year old survey that stands at 85.2. The healthier recent trend suggests some easing in the very painful experience of the past few years but the current level of the index still points towards a cautious and cash-strapped Irish consumer. A clear improvement in trend of late is suggested by six consecutive increases in the 3 month moving average measure of the series. However, since the turn of the year there have been six monthly increases and four monthly declines in the sentiment index. This volatility suggests consumers are having significant difficulty in making sense of a still very uncertain economic landscape.

The rise in Irish consumer sentiment in October was somewhat stronger than the marginal improvement reported in Euro area confidence data that reflected contrasting changes across countries. Comparable US sentiment measures showed a marked weakening in October. Concerns about the consequences of the Federal government shutdown and difficulties in resolving debt ceiling issues made consumers in the States notably more nervous about the outlook for the economy. UK data showed some small retracement after hitting a six year high in September. So, compared to their counterparts in a range of countries, it appears that the mood of Irish consumers was relatively positive in October. This implies that domestic rather than global developments prompted the rise in Irish consumer sentiment this month.

Consumers Slightly More Nervous About Household Finances

Four of the five main components of the Irish consumer sentiment survey improved in October. The exception was the forward looking assessment of household finances, where there was a modest deterioration. All but 32 out of 806 survey interviews took place before the Budget was presented on October 15th. With a substantial adjustment universally expected, it is not entirely surprising that there might have been some nervousness in regard to the specific Budget measures that might be introduced and how much they might hit household spending power.

It should be noted that the run-up to Budget 2014 was less noisy in terms of speculation as to what painful adjustments could be considered. To further ease consumer fears it was made clear that income taxes and the main benefit rates would not be hit. In the middle of the October survey period, the Minister for Finance also indicated that adjustments would total €2.5bn rather than the €3.1bn that had been suggested. That said, it seems clear that consumers recognised that €2.5bn could not be extracted painlessly from the Irish economy

The precise nature and extent of Budget related difficulties only becomes clear to the average consumer on Budget day when specific measures are announced and their exact implications for family finances are appreciated. So, there may be some Budget 2014 impact on the November sentiment survey results. There were no major ‘payday shocks’ in the form of broadly based adjustments to income taxes or benefit rates that might trigger widespread difficulties to sustain household spending. Our guess is that a multiplicity of smaller measures may trigger a less adverse response in sentiment and spending in the final months of the year than might otherwise be the case. Next month’s survey should provide some insight in this regard.

Economic Outlook Continues To Improve

Both ‘macro’ elements of the survey posted further gains in October after strong performances in September. Given that monthly sentiment data have been ‘choppy’ in 2013, it is encouraging that views on the economy improved further. This was largely the result of an easing in negative responses to 28% of those surveyed (the lowest level since February 2006) but there was also a slight improvement in the number of positive responses to 39% of respondents—the highest proportion of positive views on the economic outlook since August 2000.

Of course, these results still suggest a majority of consumers don’t expect the Irish economy to improve in the next twelve months. This highlights the entirely understandable caution that informs consumer thinking. If there is no sense of euphoria in these data, there are clear signs that consumers feel the Irish economy is set to move onto a healthier growth path in the coming year.

The survey period did not see any dramatically positive developments although the news flow was generally encouraging. Data that showed positive GDP growth in the second quarter of 2013, following three successive negative quarters, were reported as signalling that recession was over. In addition, there were a number of relatively upbeat forecasts as well as an assessment by the ratings agency Moody’s that was somewhat less downbeat than its previous reports. Our judgement is that these developments and various commentaries suggesting that the end of difficult Budgets might be close at hand encouraged a more positive view of the Irish economic outlook in October.

Jobs Market Improving Slightly But Still Difficult

The October survey also saw a fractional improvement in sentiment towards the jobs market. With a host of new job announcements and a further decline in numbers on the live register in September and October, this might be regarded as a slightly disappointing outturn. However, these responses should be regarded as a subjective indicator of the health or otherwise of the jobs market as it relates to individual respondents rather than a formal point forecast of the twelve month ahead jobless rate. The likelihood is that with unemployment still elevated and significant uncertainty about the likely pace of improvement in economic activity, Irish consumers see the jobs market remaining tough even if they also sense it is not quite as difficult as it has been through the past couple of years.

Improvement In Buying Climate A Surprise

Consumers were a little less negative in their assessment of how their household finances had evolved through the past year. It remains the case that just over half of those surveyed indicated that their financial situation had worsened through this period, nearly five times as many as reported an improvement. So, the survey is still emphasising the degree of stress on household finances but it is also signalling a marginal easing in the intensity of these pressures since the spring.

Arguably the most surprising aspect of the October results was a significant improvement in the buying climate. Traditionally this has been the most volatile element of the survey and this random aspect may be the main driver of this month’s outturn. It is somewhat surprising to see a notably positive result in this element in the weeks before the Budget. We don’t have a satisfactory explanation for this result.

The reported pick-up in spending plans may partly reflect greater confidence in the broad economic outlook. It could also be influenced by exceptionally low inflation and the presence of special offers aimed at a very cautious consumer. At the margin, it may reflect some influence from rising residential property values encouraging spending on decoration or refurbishment. It might simply be statistical noise and as such it may not reflect changing circumstances and could be reversed in future surveys.

Because we can’t explain it, we are reluctant to suggest this points towards a marked pick-up in consumer spending. The general economic backdrop remains one in which fears are easing gradually rather than one in which a palpable ‘feel good’ factor is building. As a result, it wouldn’t be too surprising if there was some retracement of recent gains in next month’s survey. However, if the improved buying climate withstands the Budget and is evident again in the November survey, it might signal some welcome improvement in household spending in the months ahead.