Irish consumer sentiment slipped slightly in August

• Sentiment slightly down from July’s seven year high but trend still positive.

• ‘Choppy’ survey and contrasting responses suggest recovery remains uneven.

• Pull back in spending plans the key driver of monthly drop.

• End of sales hit buying climate but constraints on spending power also important.

• Consumers see jobs market continuing to improve.

• Household finances remain under pressure but improve slightly.

• No sense that consumers expect budget boost to household finances.

Irish consumer sentiment slipped slightly in August following the strong reading in July that brought the sentiment index to a seven year high. The August data suggest that the trend in consumer confidence is still moving in a positive direction but consumers remain unclear as to how much the Irish economy is improving and how any upturn might affect their personal financial circumstances.

Some sense of a measure of confusion among Irish consumers at present and perhaps significant differences in the circumstances of individual consumers may be suggested by increases in both negative and positive responses to three of the five questions in the August survey.

The KBC Bank/ESRI consumer sentiment index fell to 87.1 in August from 89.4 in July. Monthly changes in the index have been quite ‘choppy’ through 2014 - with monthly changes usually moving in the opposite direction to the preceding month. Our sense is that this reflects significant uncertainty among Irish consumers as well as a still uneven economic recovery.

In spite of significant volatility in the monthly results, the trend in sentiment looks to be improving fairly solidly. This is suggested by a continuing improvement in the 3 month moving average of the seriesa measure of the underlying trend of late, to its strongest level since February 2007. A comparison of last month’s 87.1 sentiment reading with the 66.8 recorded in August 2013 also points towards a clear and continuing improvement in the mood of Irish consumers even if monthly changes have been somewhat erratic.

The August reading for Ireland has to be seen in the context of stronger than expected outturns in similar measures in both the US and the UK and poorer than expected consumer confidence in the Euro area last month. This notable difference seems to reflect contrasting views on emerging economic trends.

Consumers in the US and UK both responded to some encouraging data in relation to economic activity and jobs growth while continental European consumers appeared more downbeat, perhaps reflecting greater worries about the adverse impact of developments in the Ukraine on an economic upturn that already was more muted and more limited than that in the ‘Anglo-Saxon’ economies.

The details of the August consumer sentiment report for Ireland show three of the five main elements of the survey posting gains and two Irish Consumer Sentiment Slightly Softer In August16 September 2014 3 posting declines. The bulk of the drop in the overall index is the result of a marked decline in the buying climate as summer sales ended and back to school spending loomed large for many families.

A drop of this sort is not unusual but the decline this year was somewhat greater than that seen in recent years. Various reports suggest summer spending was stronger this year. So, it may be that a greater adjustment is now required. The August reading seems to emphasise the continuing importance of constraints on Irish household spending.

Perhaps surprisingly, the other negative element of the August sentiment survey was in relation to the outlook for the Irish economy although it remains the case that this is one of the strongest parts of the survey. Some 52% of consumers expect an improvement in the Irish economy in the next twelve months compared to the 18% that envisage a deterioration. However, this was slightly weaker than the 54;13 split reported in July.

As the latter was the strongest reading since the end of 2006, some limited pull-back is not entirely surprising in spite of largely positive economic news flow through the survey period. The surveymay have reflected some concern about the potential economic fallout from developments in the Ukraine.

It is encouraging that the employment element of the survey diverged from the broader economic outlook in August. The jobs component was the healthiest since January 2007. The August outturn is consistent with a steady stream of new job announcements and a further decline in numbers on the live register during the survey period.

Another encouraging element of the August results is an improvement, albeit modest, in both survey components related to household finances. As we noted in our comments on the July survey, the sense that Irish house prices are now rising seems to be leading to a more favourable assessment of how financial circumstances have changed in the past twelve months. Our sense is that a range of commentaries through the survey period highlighting the emerging improvement in Ireland’s Budget outlook also supported a less worrisome view of household finances over the next twelve months.

It should be noted that in spite of the improvement in both of the household finance elements of the survey in August, negative Irish Consumer Sentiment Slightly Softer In August16 September 2014 4 responses comfortably outweigh positives, suggesting consumers see their personal finances remaining under pressure. Roughly three times as many consumers reported a worsening of their financial situation in the past year as reported an improvement while there are about twice as many negative responses as positives in regard to household finances in the year ahead.

There is no indication in these data that consumers felt Budget 2015 might have a significant positive effect on their household spending power. Our sense is that the September survey could reveal some increase in consumer expectations given the tone of some recent commentary on what the upcoming Budget might deliver.

A notable feature of the August report was that three elements of the survey - jobs and both the backward and forward looking questions on household finances, showed increases in both positive and negative responses. In each instance the rise in positives was larger than the increase in negatives and translated into an improvement in all three elements last month. Results such as these are unusual. These results could reflect a significant amount of confusion about job prospects (which is possible) and about household finances (which seems less likely at least in respect of the past twelve months). Alternatively, this may suggest that a still patchy upturn in terms of sectors and geography is, unsurprisingly, having an uneven effect on Irish households.  In many respects, this simply echoes many other hints from the survey that for many consumers the recovery they are hearing about is not reflected in their own circumstances at this point in time.