Irish consumer sentiment weakened markedly in May

• ‘Technical’ factors may have played some role but unlikely to completely explain change.

• We think election campaign prompted a re-assessment of consumers’ current circumstances.

• Weakness broadly based but most pronounced in relation to personal finances.

• Drop in confidence not mirrored in other indicators.

• Two or three sentiment readings likely needed to establish if an improving trend will be re-established.

Irish consumer sentiment weakened markedly in May. The KBC Bank Ireland/ESRI Consumer Sentiment Index fell from 87.2 in April to 79.4 last month, the lowest reading since November 2013.

Scale Of Fall In Sentiment Surprising

The scale of the change in sentiment if not the direction came as a significant surprise. In what is still an uneven turn in the Irish economy, it is not realistic to expect the mood of consumers to improve continuously month after month. Instead, reasonably frequent corrections are to be expected in circumstances where household finances remain under a fair degree of pressure. As there had only been one decline in the sentiment index in the previous six months, a weaker reading in May shouldn’t be seen as a complete shock.

What is remarkable about the consumer sentiment survey for May is the extent of the decline from April. The 7.8 drop in the index is relatively large although not unprecedented – it is the 14th largest monthly fall in the eighteen year history of the index. As such, it would appear to suggest a clear deterioration in Irish consumer thinking of late. In the context of widely held expectations of a marked improvement in the fortunes of the domestic Irish economy through 2014 this would represent something of a setback.

In view of the scale of the change in the sentiment index in May, we re-checked the preliminary data but this didn’t impact on the initial results.  In the paragraphs below, we consider a number of possible explanations for the poor May reading before we analyse the detailed results. We begin by looking at some technical considerations before examining whether any particular developments during the survey period might be consistent with the sharply negative outturn.

Could It Be A Statistical ‘Blip’?

The size of the drop in the May sentiment reading may be signalling a substantive change in the mood of Irish consumers but it could also reflect a tendency for data sets to throw up extreme outliers periodically that are largely statistical ‘noise’ rather than indicators of dramatically changed circumstances. One might expect monthly series to throw up extreme values of this sort every couple of years (i.e. monthly changes of around two standard deviations might be expected in around 5% of observations).

The history of the Irish consumer sentiment survey suggests random outliers that are subsequently reversed occur even less frequently than this. Unfortunately, we will need to see another couple of months’ data before we can definitely conclude as to whether the May results were simply the result of the random variability inherent in Irish Consumer Sentiment Falls Sharply In May9 June 2014 3 these sorts of data.

Another possible influence on the May results is the nature of the survey. As is standard practice, consumers are asked each month whether various metrics such as the economy, the jobs market and their personal finances are improving or worsening. In months where some significant event points clearly in one direction, there can often be an outsized change in the survey as significant numbers of consumers shift their responses in the same direction. Again, while this is a characteristic of regular surveys, it is not one that has thrown up notably volatile readings on Irish consumer sentiment through the past eighteen years.

A Change In Conditions Or In Consumer Thinking?

While various ‘technical’ issues along the lines discussed above may have played some role in the sharp drop in the Irish consumer sentiment index in May, a number of developments through the survey period also likely contributed. As we noted in previous commentaries, consumers have become more optimistic through the past year primarily in response to improving ‘macro’ news rather than any marked improvement in their own circumstances. A dichotomy of this form can’t be sustained indefinitely.

It should be noted that the sharp drop in consumer sentiment occurred in a month in which the evidence from live register numbers, car sales and tax revenues suggests the continuation of a modestly improving trend in the Irish economy at the macro level. There is little in these or other recent data or in anecdotal reports that points towards any marked deterioration in Irish economic conditions of late although employment data for the first quarter and retail sales for April (both released after the survey period) hint that conditions may not be improving as markedly as is sometimes suggested.

A number of developments through the May survey period may have caused Irish consumers to focus more on their personal finances and the enduring nature of the problems many are facing. In turn, this could have caused them to see their economic glass as half empty rather than half full.

Our sense is an intense if understandble focus on the difficulties still facing the Irish economy in the lead-up to the end of May elections led consumers to downgrade their assessment of their current circumstances. Continuing controversies regarding the introduction of household water charges and access to medical cards may also have contributed. As a result, pressures on personal finances, which have been repeatedly signalled in recent sentiment readings, may have been seen as a deeper and longer lasting problem. As such, the weakness Irish Consumer Sentiment Falls Sharply In May9 June 2014 4 of the May survey is entirely consistent with the poor performance of Government parties in the recent elections.

Our sense is that the weakening in Irish consumer sentiment in May primarily reflects domestic factors. However, an unexpected, albeit more limited, decline in US consumer sentiment last month may illustrate how even in a notably healthier economy consumers feel an uneven recovery is not translating into an improvement in their individual circumstances. Significantly, both Euro area and UK consumer confidence measures posted multi-year highs in May, suggesting there was no hugely negative global development that might explain the poor Irish reading.

A Broadly Based Deterioration

All five components of the Irish Consumer Sentiment Index declined in May—the first time this has happened in sixteen months, and suggesting a marked change in thinking. The largest declines were in those elements of the survey relating to household finances. The number of consumers that expect their personal finances to worsen in the next twelve months climbed from 33% of respondents in April to 46% in May while the number expecting an improvement held steady at 17%.

While negative responses to each question climbed in May, it remained the case (as it has been for the past six months) that the balance of opinion was strongly negative in relation to both the backward and forward looking questions on personal finances while Irish consumers were solidly positive in terms of their thinking on the economy and jobs. This meant the negative balances on personal finances increased notably in May while the positive balances on macro issues became smaller.

Interestingly, a consistent pattern was evident across the various elements of the survey in May with the weakening in sentiment largely attributable to a jump in negative responses whereas positive readings held broadly steady. Again, this suggests previously neutral or ‘undecided’ consumers opted for a negative assessment in May.

Will ‘Feel-Bad’ Persist?

As noted above, the sharp weakening in sentiment in May wasn’t mirrored in other relevant economic indicators that are currently available for the survey period. It is also notable that the smallest decline in the survey between April and May was in the element that relates to the buying climate. If Irish consumers felt there was a sea-change in their circumstances this would likely have prompted a marked decline in spending intentions.

To summarise, we are not surprised that there was a decline in Irish consumer sentiment in May—this is not a straight line recovery that can be expected to progressively improve each and every month. As we noted previously, pressures on many households’ finances also make it difficult to envisage a marked improvement in sentiment in current circumstances. That said, the scale of the turnaround in sentiment in May is difficult to explain satisfactorily.

Our sense is that ‘technical’ factors played some role, but we think the size of the drop in consumer sentiment in May also owes a great deal to the very negative tone of the election campaign. Both of these influences could be reversed at least in part in upcoming surveys.

As a result, it may take a couple of months sentiment data to establish whether the May reading marks a lasting change in consumer thinking that could weigh on sentiment and perhaps on consumer spending for the remainder of the year.