Irish consumer sentiment registered a modest improvement in November

• Modest improvement in sentiment may hint consumers think they are prepared for Budget 2013.

• Confidence is still fragile. So, details and delivery of Budget can make a difference.

• Better sentiment in Ireland mirrors that in US and UK but at odds with gloomier Eurozone.

• Small improvement in economic outlook suggests consumers expect modest growth next year.

Irish consumer sentiment registered a modest and perhaps surprising improvement in November. The KBC Bank Ireland/ESRI Consumer Sentiment Index rose to 63.8 from 60.9 in October. This represents a second successive monthly gain following the sharp decline seen in sentiment in September. At current levels, the sentiment index still suggests Irish consumers are cautious and cash constrained but they appear to be a little less fearful about what Budget 2013 may hold than seemed the case a couple of months ago.

A key task for the Minister for Finance is to sustain this fragile improvement by ensuring consumers see signs of progress, as well as pain, in the measures announced on Wednesday.

The slightly better Irish sentiment reading for November puts Irish consumers firmly in an ‘Anglo-Saxon camp’ showing relative optimism of late. A modest increase in the comparable US confidence measure, prepared by the University of Michigan, was enough to raise consumer sentiment in the States to its strongest level since September 2007. Similarly, UK consumers recorded their strongest confidence reading in 18 months. In contrast, Euro area consumer confidence posted the sixth monthly decline in a row to take this measure to its lowest level since May 2009. In very broad terms, US consumers (and to a lesser extent their UK counterparts)  seem to be responding to some encouraging economic signs of late, particularly in relation to job prospects. As a result they are becoming a little less concerned about their personal finances as a result. In contrast, in the Euro area, there is a growing sense that things could get far worse before they get better, whether that is in terms of the burden of austerity in some countries or possible bailout costs in others. With unemployment moving clearly higher in the Euro area, ‘macro’ and personal concerns are merging to suggest an increasingly difficult future. It might be argued that US consumers are not properly factoring in the risks posed by the ‘fiscal cliff ’ and that Euro area consumers are not reflecting the improvement in financial market sentiment of late. However, the diverging mood of consumers in the US and the Euro area corresponds in very general terms with significant differences between current forecasts for economic growth in these economies.

The contrast provided by recent US and Euro area sentiment readings provides one context for an analysis of the November data for Ireland. The current level of the Irish index suggests consumers here remain apprehensive. The volatility evident in the survey in the past few of months highlights the degree of uncertainty about both ‘macro’ and individual prospects at present. Relatively ‘choppy’ sentiment readings of late follow directly from this uncertainty. Finally, the improvement in sentiment in November may suggest Irish consumers haven’t abandoned all hope even if there is a clear understanding that economic conditions generally, as well as their own personal financial circumstances, will remain challenging through the coming year.

Reflecting the range of positive and negative influences acting on Irish consumer sentiment at present, it is not entirely surprising that the details of the November sentiment survey were mixed. There was a marginal improvement in consumer views in relation to the outlook for the Irish economy. About half of those interviewed in November felt there would be little change in Irish economic conditions in the next 12 months. Of the remainder, slightly more expect a further weakening than see stronger conditions taking hold but this marginally negative balance represents a significant improvement compared to responses to this question through recent years. These results appear broadly consistent with an emerging view among Irish consumers that things may have stopped getting worse for the Irish economy but no speedy improvement is envisaged.

With sentiment in relation to economic activity improving only marginally, it wasn’t entirely surprising that views on job prospects were largely unchanged in November. This result also likely reflected mixed news on the jobs front during the survey period with a number of new job announcements offset by layoffs at Liberty Insurance and warnings about job cuts at An Post. While concerns about the outlook for employment may have eased somewhat through 2012, it remains the case that nearly three times as many consumers think unemployment will rise in 2013 as expect it will fall.

The most surprising element of the November survey results was an improvement in consumers’ assessment of their personal finances. In the two previous months, this element deteriorated significantly—presumably because of concerns about what Budget 2013 may imply for household spending power. The November survey shows a partial correction of that decline. This may reflect a view that consumers feel fears about Budget 2013 may be overdone. Certainly, the survey period saw some temporary easing in speculation as to the precise measures that Mr Noonan might announce. This might have prompted a belief that most of the bad news was now fully known and built into expectations of household finances for 2013. It could also be the case that the coincidence of falling inflation and some tentative signs of stabilisation in residential property prices encouraged a view that, at least at the margin, other pressures on household finances might be beginning to ease. We are not sure this is a fully satisfactory explanation of the improvement in sentiment in relation to household finances seen in the November survey. However, our sense that this should be seen as marking only a very limited change in consumer thinking is supported by the fact there was a small decline in the buyer climate in November. The fact that consumers were a little more hesitant to contemplate making major purchases in November probably owes something to the prospect of significant outlays over the Christmas period. However, it also suggests Irish consumers remain cautious about their financial circumstances.

The November sentiment survey results provide an interesting backdrop to this week’s presentation of Budget 2013.  The small improvement in sentiment last month suggests consumers still cling to a view that a gradual improvement in Irish economic conditions is progressing  while the level of the index suggests there is a reaction that consumers will remain difficult for some time. However, the improvement in consumer thinking on personal finances might suggest they feel they are prepared for any bad news that the upcoming Budget may bring. If consumers wake up on Thursday morning feeling that Budget 2013 has made them much poorer than they expected, there is some risk that sentiment and spending could be on a weaker than expected trajectory in 2013. If, on the other hand, the Budget 2013 package can be presented in a manner that suggests the coming year will be difficult but bearable and also encourages the view that the Irish economy and household finances are slowly moving closer to a return to sustainable growth, the near term outlook may be better than envisaged.