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Irish consumer sentiment eased back somewhat in July
• Worries about poor GDP data and job losses a key influence.
• Drop also likely a correction after outsized increase in June.
• Trend in confidence still modestly positive, but...
• ...Survey suggests any economic improvement remains tentative and fragile.
• Better Buying climate may hint at slightly healthier spending trend.
Irish consumer sentiment eased back somewhat in July following the sharp increase reported in June. In part, this drop is an understandable correction to the outsized increase of the previous month but it also likely reflects Irish consumers’ heightened sensitivity to disappointing news on the economic front.
The KBC Bank Ireland/ESRI Consumer Sentiment Index fell to 68.2 in July from 70.6 in June. This 2.4 point drop should be seen in the context of a 9.4 point rise between May and June that brought the index to its highest level since October 2007. As a result, the July reading is still the third strongest survey since October 2007. For this reason, we think the underlying trend in confidence remains modestly positive as a rise in the 3 month moving average measure from 63.5 last month to 66.7 suggests.
Sentiment Stronger Elsewhere In July
The dip in Irish consumer sentiment in July contrasted with notable gains in confidence measures in a range of countries last month. In the US, the comparable sentiment measure rose to its strongest level in 6 years. In the Euro area, confidence improved to its best reading in about two years while the corresponding UK yielded its healthiest reading since April 2010. Because the July 2013 results for Ireland are the third strongest in almost six years, they are broadly consistent with the recent trend in other countries of late. However, it would seem that the monthly decline in the Irish sentiment index in July reflects domestic rather than global influences.
Irish Macro Concerns To The Fore
Four of the five components of the Irish Consumer Sentiment Index declined in July. In contrast to the experience of the past six months, the sharpest weakening occurred in those parts of the survey related to consumers’ perceptions of the broad macroeconomic environment rather than their own household finances. We think this reflects a couple of notably disappointing developments during the survey period that negatively influenced consumers’ thinking on the outlook for Irish economic growth and employment. The release of GDP data in late June suggested that Irish economic growth was a good deal weaker in 2012 than previously thought. Perhaps more importantly, these data also showed that there had been three successive quarters of negative GDP growth between the summer of 2012 and the first three months of 2013. A stream of media headlines proclaiming that Ireland had lapsed back into recession in late 2012/early 2013 appears to have struck a chord with Irish consumers (although we tend towards a possibly pedantic view that for a variety of reasons, declining Irish GDP should not be regarded as a true indicator of whether or not recession has taken hold).
We suggested previously that a slightly improving trend in Irish consumer sentiment was largely the result of a gradual easing in more extreme fears regarding possible economic outcomes among Irish consumers rather than any strong sense that notably better economic conditions were taking hold. The apparently strong impact of poor GDP data on the July survey results is consistent with the idea that Irish consumers’ sense of changing economic conditions of late owes more to media commentary than palpable personal experiences. As such, any modest trend improvement looks to be both tentative and fragile.
Job Worries Return
A sense of darker economic clouds is also evident in a significant weakening in consumer views on the outlook for jobs in the July survey. Again, we think a fairly specific development during the survey period may go some way to explaining the material change in thinking between June and July in this element of the survey. At the beginning of July, media reports suggested that between 1,000 and 2,000 job losses might result from branch closures at Ulster Bank and the loss of a service contract at HewlettPackard. It should be noted that Ulster Bank subsequently indicated that no new redundancies were envisaged and the survey period also saw a range of new job announcements. However, the focus of consumers seems to be on recent bad news.
While the number of survey respondents that signalled an expectation of an improvement in the Irish jobs market, remained at 27% between June and July, the number that expected a further worsening rose substantially from 33% to 43% of respondents. These results appear to highlight a particular sensitivity to poorer than expected news at a time when consumers may feel that the worst is over. Clearly, the effects of job losses and new job announcements on consumer sentiment are not equal at present. In circumstances where a gradual and modest improvement in the jobs market appears to be underway, any signs of renewed bad news on the jobs front seem to have a much greater impact on the mood of consumers.
Consumers Marginally More Downbeat About Household Finances
Consumers were also slightly more negative in their assessment of their own household finances in July than in June but this change was relatively modest compared to that seen in relation to the ‘macro’ elements of the survey. Concerns about the possible scale and nature of austerity measures in next October’s Budget may have played some role in this regard while slightly more encouraging news on the housing market and persistently low inflation should have acted in the opposite direction. It is also likely that a poorer ‘macro’ assessment would have fed into a more downbeat assessment of the outlook for household finances in the coming year.
Will Better Spending Climate Last?
The one element of the survey that saw an improvement in July was the buying climate. Again, we think a number of specific factors affected this element of the survey in July. First of all, it’s likely that there was significant price discounting in summer sales following a relatively weak first six months for retail spending. Alternative discounts may have encouraged those consumers that are cautious rather than cash strapped to contemplate loosening the purse strings. Second, the advent of the new 13-2 motor registration and an associated range of special offers may also have influenced consumer thinking in terms of major outlays. Finally, exceptionally good weather may have encouraged some element of ‘feel-good’ spending, particularly on seasonal items such as gardening or outdoor related activities. Importantly, however, unusually warm and sunny weather through the survey period failed to offset the negative impact on sentiment of dark economic clouds created by poor GDP data and fears in regard to job losses. As we noted last month, the consumer sentiment survey is very much focussed on economic and financial concerns rather than the spectrum of factors that affect Irish peoples’ mood.
In our commentary on the June sentiment data we suggested the rise in the index from May was exaggerated and probably inflated by temporary influences such as unusually good weather. Our sense is that the slightly lower July reading is in part an understandable correction of the outsized gain in June. Significantly, we also feel the July results have been weighed down by concerns about a return to recession as well as a couple of high profile negative jobs announcements. The July survey also emphasises the fragile nature of Irish consumer confidence at present and a particular sensitivity in relation to the outlook for economic growth and jobs. In turn, this emphasises the importance of crafting a Budget in October that doesn’t unduly damage the growth prospects of the Irish economy or deliver any nasty surprises in regard to household spending power in the coming year.