Irish Consumer Sentiment Improves Marginally In February

3/4/14

Irish consumer sentiment rose marginally in February

• Third Monthly Gain Pushes Index To Near Seven Year High

• No Major Changes In Consumer Thinking But Details Somewhat Surprising

• Consumers Still Positive But Slightly More Cautious On Economy And Jobs

• Views On Household Finances Improve Fractionally

• Purchasing Plans Stay Strong; Statistical Blip Or Start Of Stronger Spending?

Irish consumer sentiment rose marginally in February, the third monthly gain in a row, the first time this has happened since mid-2012. The KBC Bank Ireland/ESRI Consumer Sentiment Index rose to 85.5 from 84.6 in January. Although the monthly change was fractional, it makes the February reading the strongest in nearly seven years (the index was last higher in May 2007).

The recent trend in sentiment suggests consumers are increasingly confident that the Irish economy is emerging from the extreme difficulties of recent years. This largely reflects a gradual easing in fears. So, the rise in the index is primarily the result of a reduction in the negative influences on sentiment rather than the emergence of an array of extremely positive factors boosting confidence.  While better news on the Irish economy, on jobs and the property market of late have clearly helped, we think the sentiment index would have to rise a good deal further to signal an environment in which Irish consumers feel able and willing to spend more freely.

The February data confirm that there has been a clear improvement in confidence of late but the details of the report also suggest some risk of a modest correction in the sentiment index in the next month or two. Usually, there is a pullback in spending plans in February as new-year sales end and post-Christmas bills arrive. However, this didn’t happen last month.

We don’t think a dramatic pick-up in spending is already underway even if the trend should improve through the coming year. This means there is a risk that the buying climate element of the survey weakens significantly in the near future. The speed and scale of any pull-back may give some clues as to whether Irish consumers are starting to plan for a notably healthier economic and financial future.

The improvement in Irish consumer sentiment in February mirrored a similarly limited gain in the corresponding US indicator last month. Analysts attributed that outcome to the restraining influence of poor weather in the ‘States and an associated weakness in the jobs market on the mood of a consumer who has become generally more confident about the outlook for the US economy of late.

Because weather appears to have played some role in the US reading in February and it was very wet in Ireland during February, we decided to re-estimate some work we did last year on the influence of unusual weather on the mood of Irish consumers. Once again, we couldn’t find any statistically significant effects from unusually wet weather and only a limited effect from extremely sunny weather on Irish consumer sentiment.  These results are consistent with the marginal improvement in sentiment last month in spite of very wet Irish Consumer Sentiment Improves Marginally In February4 March 2014 3 weather. That said, this absence of evidence can’t be taken as evidence of the absence of any weather effect. Instead, it may simply be that extreme economic ‘weather’ in Ireland in recent years has dwarfed any impact from greater than usual rainfall.

February also saw an unchanged consumer confidence reading in the UK as some pull-back in the current buying climate offset improvements in views on the future. There was also an unexpected if modest fall in consumer confidence in the Euro area last month. This was centred on slightly greater concerns about the economy and the outlook for jobs. Judged by reference to developments elsewhere, the slight improvement in the mood of Irish consumers in February seems quite encouraging.

The details of the Irish consumer sentiment survey for February are somewhat surprising in that both elements of the survey that relate to the ‘macro’ environment weakened slightly compared to January. Through the past year these elements have been the key drivers of the improvement in sentiment as consumers became less fearful about the general economic outlook and, in particular, the prospects for jobs. It should be emphasised that the February reading doesn’t signal any notable change in consumer thinking on these areas.

 In relation to the economy and jobs, positive responses continue to outweigh negative responses by a healthy margin. It remains the case that 51% of consumers expect the Irish economy to improve in the next twelve months but the number expecting a weakening edged up from 19% to 21%. This change is not significant but it might be viewed as disappointing given a broadly positive news-flow including an upgrade by Moody’s during the survey period. It should probably be seen as nothing more than a correction but it reminds us that we can’t take it for granted that consumers will automatically upgrade their economic outlook every month.

Similarly, thinking on jobs remains broadly positive. As in January, some 28% of consumers see the jobs market weakening in the next twelve months while 36% expect an improvement, down from 40% a month earlier. Again, the balance of news on employment was clearly positive with a range of new job announcements. However, there were also concerns about the reality or risk of job losses in a number of high profile companies including Mount Carmel Hospital, Ulster Bank, Elverys, Kepak and Honeywell. As we noted previously, in a challenging jobs market, job losses are likely to have much more of an impact on sentiment than new job announcements.

While it was slightly surprising that both ‘macro’ elements of the survey edged down in February, it was more surprising that all of the ‘micro’ Irish Consumer Sentiment Improves Marginally In February4 March 2014 4 components improved last month. Again, we must emphasise that the changes were marginal and that negative answers predominate in regard to household finances. However, it may be that increasing talk about the possibility of tax cuts, allied to very low inflation and signs of life in the property market, are supporting the mood of Irish consumers of late.

Although some case can be made for a slightly less negative view of household finances of late, we struggle to rationalise the improvement seen in the buying climate in February. It could be that special offers on cars and other consumer durables are making less terrified consumers consider replacing goods that might normally have been changed some time ago. This might be consistent with what is a very modest change in this element of the survey and one that was driven entirely by an easing in negative responses. That said, while our forecast is for an increase of around 1.5% in consumer spending in 2014, we don’t see grounds for an imminent ‘take-off ‘.  Instead, we think the February buying climate may simply be a statistical outlier.

In summary, we think the headline consumer sentiment number for February points to an ongoing if modest improvement in confidence of late. We think the make-up of the February results is a little surprising and may prompt some correction in the index in the next month or two. Of course, a weaker buying climate could be offset by further gains in other components of the survey.

Our sense is that consumers now discount some measure of recovery in the Irish economy as well as an improvement in the jobs market (although the latest employment data may support sentiment in the March survey). While consumers’ expectations in both of these areas appear reasonably modest, it may take quite an amount of good news to keep pushing these elements of the survey higher. Consumers will need to feel progressively more confident about their household finances if their mood is to continue to lift in the months ahead.