Irish consumer sentiment was broadly unchanged in February

• Second consecutive monthly increase suggests extreme fears of late 2011 have faded.
• Easing in job concerns the key driver of improvement in confidence last month.
• Current level of Sentiment Index implies Irish consumers are still very gloomy.
• Household finances remain a worry as increased charges, insurance costs and fuel bills hit home.
• Will uncertainty and fear be boosted by the referendum debate?

Irish consumer sentiment was broadly unchanged in February.  While the KBC Bank Ireland/ESRI Consumer Sentiment Index edged up to 57.0 from 56.6 in February, changes of this magnitude can’t really be regarded as significant.  So, it seems fairer to suggest the recovery in consumer confidence in January that followed the marked weakening in December was sustained last month.

The steady Irish reading for February has to be seen in a context of significant improvements in comparable sentiment measures for the US and marginal gains in Euro area and UK confidence indicators.  The solid increases revealed in February US data seem to reflect consumers there are sensing a clear improvement in the jobs market that eludes most European economies at present.  The key message from the fractional change in Euro area consumer confidence last month is that sentiment across countries varies widely around an aggregate reading that suggests many households remain nervous and financially stretched.

After considerable volatility in Irish consumer sentiment data in the past three or four months, the marginal change in the Index in February is reassuring for a couple of reasons.  In a narrow technical sense it suggests the survey hasn’t become more ‘noisy’ or ‘jumpy’ of late.  More fundamentally, the February results appear consistent with a somewhat ‘quieter’ economic environment of late particularly in comparison to the final months of 2011 when concerns surrounding a possible EMU break-up and another difficult budget prompted a sharp worsening in sentiment.  With no dramatic changes in economic conditions through the February survey period, the Sentiment Index reflects a broadly unchanged consumer view of both national and personal prospects.

The current level of the Sentiment Index suggests Irish consumers remain gloomy about the outlook for activity and jobs in the Irish economy in the next twelve months and see that environment translating into continuing pressure on their household finances.  That said, the readings for January and February also suggest the average consumer feels things are not quite as bad as they feared in December.  Irish consumers may also be reflecting on developments in Greece and concluding that difficult though circumstances here might be, they could be notably worse.  There is no doubt that Irish consumers are fully conscious of the difficulties they and the economy as a whole face in early 2012 but it seems they have also detected some faintly encouraging or at least less threatening developments within the gloom.

The current level of the Sentiment Index suggests Irish consumers remain gloomy about the outlook for activity and jobs in the Irish economy in the next twelve months and see that environment translating into continuing pressure on their household finances.  That said, the readings for January and February also suggest the average consumer feels things are not quite as bad as they feared in December.  Irish consumers may also be reflecting on developments in Greece and concluding that difficult though circumstances here might be, they could be notably worse.  There is no doubt that Irish consumers are fully conscious of the difficulties they and the economy as a whole face in early 2012 but it seems they have also detected some faintly encouraging or at least less threatening developments within the gloom.

The other comparatively weak elements of the February survey related to consumers assessment of their household finances. Facing a range of increases in public services charges as well as in areas such as health insurance costs and fuel bills, it is not surprising that consumers took a more negative view of their personal financial situation last month.  Indeed, it may be more surprising that the decline in these elements of the survey was so modest in February.  In part, this reflects an already entrenched view that household finances will weaken further in the coming year.  Only 1 in 10 consumers expect an improvement in their personal finances in 2012 compared to just over half who expect a deterioration.  The limited decline in the personal finances elements of the survey in February may also reflect some positive influence from recent cuts in ECB interest rates and the continuing expectation that borrowing costs will remain subdued through 2012.  However, there could be some downside risk to this element of the survey in coming months from continuing upward pressure on oil prices.

Although three of the five main components of the survey were weaker in February than January, the Sentiment Index rose marginally last month because both of the ‘macro’ elements recorded decent increases.  The strongest aspect of the February survey related to the outlook for jobs.  Again, it must be emphasised that Irish consumers still expect employment prospects to remain very weak through the year ahead.  Fifty-seven per cent of those surveyed in February expect unemployment will rise further in 2012 while just 14 per cent see joblessness coming down.  While this represents a strongly negative balance, it was about 10 percentage points smaller than the balance of responses recorded in the January survey.

A number of factors may be driving a slight easing in the extent of jobs gloom.  First of all, the survey probably reflects two consecutive months of decline in the number on the live register.  Second, consumers may be responding to the increased frequency of new job announcements in recent months.  Finally, consumers are probably recovering from worries that a possible EMU break-up would have particularly severe consequences for jobs. 

The improvement in consumer sentiment in regard to the general economic outlook that occurred last month was smaller than the change in thinking on jobs.  Again, current readings remain fairly downbeat.  The February survey shows 58% of consumers expect economic conditions will worsen in the coming year while just 16% anticipate an improvement.  So, the survey suggests the range and extent of difficulties facing the Irish economy area are well understood by the average consumer.  Although most formal economic forecasts point towards marginally positive GDP growth for 2012, consumers intuitively judge that economic conditions as they apply to them will remain under pressure through the coming year.  This suggests some potentially important questions.

Given the level of concern about the economic outlook, it might only take only a relatively modest improvement in economic prospects to bring about a marked improvement in sentiment and, by extension, some improvement in household spending.  However, an alternative view is that current fears are embedded to the extent that sentiment will only improve long after a reasonably solid recovery has begun.  While the history of the series suggests sentiment moves in a pre-emptive way, the scale of concerns now facing Irish consumers cautions against expectations of an early turnaround in confidence or spending.

Another important question concerns the impact of the looming debate on the fiscal compact in the run up to the referendum on this topic.  The volatility in the Sentiment Index in recent months suggests consumers are significantly affected by uncertainty.  The end year reading also suggested apocalyptic warnings can weigh particularly heavily on the mood of consumers.  There is a significant risk that the upcoming debate on the fiscal treaty generates far more heat than light.  In such circumstances, consumer confidence and discretionary spending could come under renewed downward pressure.  This further emphasises the need for a clear and cogent outline of the issues involved.