No major change overall as contrasting influences cancel out.

Improving ‘macro’ view offset by concerns about household finances.

Spending power not being boosted by stronger Irish economy.

More consumers upbeat about jobs than at any time since 2000.

Disappointing sentiment readings worldwide suggest consumers feel upturn is for other people.

Key task for policymakers is to deliver ‘inclusive’ growth while keeping policy settings on a sustainable course.

Irish consumer sentiment held steady in May as growing optimism about the outlook for the economy and jobs offset a little more caution about household finances. At current levels the sentiment index is pointing to a fairly healthy upturn in the economy as a whole. However, the details continue to highlight an important disconnect between very positive ‘macro’ conditions and a consumer who remains concerned about a lack of improvement in household spending power. In turn, this implies that from the perspective of the average Irish consumer the recovery is a case of two steps forward and one back rather than a widely shared ‘feel-good’ factor  that is driving marked gains in confidence and consumer spending.

The KBC Bank/ESRI consumer sentiment index slipped fractionally to 98.5 in May from 98.7 in April. Tiny changes of this sort aren’t statistically significant and as such it is more correct to say that Irish consumer sentiment held broadly steady last month. The underlying trend as suggested by the three month moving average of the series continued to edge higher in May-from 97.6 to 98.4. So, there is little suggestion in these data that confidence is slipping. However, consumers may need to see a more tangible improvement in their own financial circumstances or at least a very real prospect that this will occur before long if the sentiment index is to move materially higher.

Of the five main elements of the Irish consumer sentiment index, three posted monthly declines in May while the remaining two both increased. In each instance the monthly change was relatively modest. So, the May reading doesn’t signal any dramatic change in consumer thinking. Instead, it emphasises a persistent divergence between the challenging conditions Irish consumers are themselves experiencing and the extremely positive news they are hearing and reading about the broader economy. The three components that declined relate to consumers’ own financial circumstances and spending plans while the two that improved relate to the outlook for the economy and for jobs.

We cannot be sure exactly what caused consumers to be a little more downbeat about their personal finances in May but several possibilities suggest themselves. It could be the case that the roll-out of water charge bills served as a painful reminder of continuing pressures on household spending power. The ongoing recovery in oil prices might also have played some role as could significant increases in some elements of their living costs of late such as motor insurance. Finally, it might be that those consumers who are renting are also increasingly concerned by what may seem to be a relentless rise in accommodation costs. Significantly, consumers' assessment of the buying climate weakened less in May than their assessment of their own personal finances. So, the survey doesn't suggest any marked retracement in consumer spending. Instead, it implies we shouldn't expect a generalised consumer spending boom to take hold.

In contrast to unfavourable ‘micro’ developments, the news flow on the ‘macro’ environment facing Irish consumers remained favourable through the May survey period. A number of upbeat commentaries including new forecasts from the EU commission highlighting Ireland’s economic growth rate as likely to be the strongest in Europe this year consolidated the view that recovery is building considerable momentum.

A range of new job announcements of late confirmed that the improvement now underway in the Irish economy is not confined to measures such as GDP that are somewhat removed from the everyday experience of the average consumer. May results showed half of those surveyed expect a further improvement in the jobs market in the next twelve months- the best reading in fourteen years. Yet the message from responses to survey questions on the immediate circumstances of the average consumer is that reassuring though these ‘macro’ gains might be,any ‘trickledown’ effects to household spending power are still very limited.

It should be emphasised that the Irish consumer is not unique in facing difficulties trying to make sense of frequently contradictory influences on their wellbeing at present. In May, the most comparable measure of US consumer sentiment fell to a six month low that seems to reflect concerns that a now well established upturn in the ‘States is not delivering a clear improvement in living standards. In the Euro area, consumer confidence fell for the second month in a row while UK consumers were at their gloomiest in a year in May.

A range of ‘local’ influences undoubtedly contributed to this development but there seems to be some commonality in the view that many consumers worldwide  feel their personal circumstances are not matching a much heralded upturn in economic activity. As the lack of ‘feel-good’ is weighing on household spending and restraining the strength and reach of the recovery, there is a significant economic and political need to make sure consumers do not feel excluded from the upswing.

Balancing the need for policy to support ‘inclusive ‘ growth with the requirement that policy should not be reckless is likely to be a major issue in Ireland and elsewhere in the next year or two.It is not simply a question of whether policy is responsible or irresponsible. Finding the precise policy settings that move Ireland and other economies on to a healthy and sustainable path is not a binary choice. This is a  technical rather than theological issue even if political considerations are likely to exert a significant influence  The dilemma is particularly acute in the case of fiscal policy but is also an issue for Central Banks worldwide as they grapple with the benefits and costs of altering exceptionally low policy interest rates.

 

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.