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Sentiment slightly weaker as consumers scale back expectations for income growth.
|Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland|
|Irish consumer sentiment weakened modestly in February, largely as a result of reduced confidence in regard to the outlook for household spending power. In part, this was due to a slight scaling back of expectations for the Irish economy and jobs but it seems to owe more to lower expectations as to how much the recovery will translate into stronger financial circumstances for the average Irish consumer.
The KBC Bank Ireland/ESRI consumer sentiment index declined to 105.8 in February from 108.6 in January, reversing a little over half the gains of the previous month that had prompted the strongest reading in 15 years. It is often the case that the sentiment index weakens in February as the arrival of post- Christmas bills prompt a scaling back of spending intentions. Moreover, at a time of significant uncertainty worldwide, it is scarcely surprising to see a partial correction of January’s gains.
For these reasons, we would not regard the drop in sentiment in February as particularly surprising or alarming. We would also emphasise that at current levels, the sentiment index is comfortably above its long term average level of 86.1and all five main elements of the survey reported more positive than negative responses in February. That said, last month’s reading does highlight that Irish consumers remain fairly cautious and are very much attuned to a range of factors constraining the economic upswing as it applies to them.
The drop in Irish consumer sentiment in Ireland in February mirrored a similarly small decline in US consumer sentiment. As we noted previously, consumers in the US have not seen the scale of income gains that might normally be expected in a recovery that is relatively mature and has produced an unemployment rate below 5%. While current US confidence readings are still relatively healthy, increasing worries about the economic outlook mean they have drifted some way below levels reported a year ago.
The performance of Irish consumer sentiment in February was not nearly as disappointing as that recorded in the European Commission measure of consumer confidence in the Euro area which showed the largest monthly fall in three and a half years, pushing this index back to its lowest level since December 2014. Although consumers in the single currency area were slightly more nervous about their own financial circumstances last month, the key development was a sharp deterioration in their assessment of the general economic outlook.
In recent months, threats to a still fragile Eurozone upswing have come in the form of volatile financial markets and worries about Chinese economic prospects. From the perspective of European consumers such global concerns have been hugely amplified by difficulties in formulating European policy responses to issues such as ‘Brexit‘ and, in particular, the refugee crisis.
The performance of comparable confidence indicators in other regions suggests global factors may have played some role in the softer Irish consumer sentiment reading for February. While we have clearly moved away from the recent crisis, consumers here and elsewhere are grappling with what from their perspective may seem to be a consistently threatening ‘new normal’. Moreover, in each instance, emerging risks come in the shape of developments significantly removed from most households experience and even further from their sphere of influence.
Our judgement is that such ‘macro’ concerns played some role in the pull-back in Irish consumer sentiment in February. However, the survey period also saw the continuation of extremely positive readings from a range of Irish economic indicators and a large number of new job announcements. As a result, the elements of the sentiment survey that relate to the general economic climate and the outlook for jobs were only marginally weaker than in January.
Only one of the five key components of the sentiment index increased between December and January. This was consumers’ assessment of how their financial circumstances had changed through the past twelve months. This saw a modest further improvement on the January reading which had been the first since 2006 in which a larger number of consumers reported their financial circumstances had strengthened rather than worsened in the preceding twelve months.
While this element of the survey is moving in a positive direction, it remains some distance from signalling anything like a broadly based feel-good factor has taken hold. The positive balance remains marginal; 27% of consumers reported gains compared to 24% that reported a deterioration. So, it seems that many households remain under financial pressure. However, a changed fiscal stance, low inflation and some improvement in earnings have put spending power on a slightly stronger footing of late.
In stark contrast and somewhat surprisingly, the weakest element of the survey last month was in relation to consumer thinking on the outlook for their household finances in the coming twelve months. Although it remains the case that more consumers see gains rather than losses in spending power in the coming year, the balance of positive to negative responses fell from 38:11 in January to 31:15 last month, implying a clear weakening in consumers judgement in relation to their financial prospects.
Recent global and domestic uncertainty may resonate more strongly because of the recovery in personal incomes may still be tentative for many. As has been the case since last summer, the number of consumers anticipating healthier personal finances clearly outweighs those envisaging a further deterioration. So, there is a sense that the worst is over for Irish households but only a minority expect a clear improvement in their financial situation in 2016. In this sense, the survey may suggest the upswing is not as broadly felt as most relevant ‘macro’ indicators would imply.
We can’t pretend to be able to fully explain the weaker assessment of consumers’ own financial prospects in the February survey. We might speculate that it stems from a broad view that greater uncertainty is likely to weigh on income prospects. Recently increased concerns about the global economy may have translated into a view that although an apocalyptic outcome for the Irish economy might be avoided, current threats might preclude any clear or widely felt improvement in living standards for Irish consumers in the year ahead. It might also be that the run-up to the recent election could have prompted notably reduced expectations in the scope for significant future income gains from domestic fiscal largesse.
Our sense is that heightened uncertainty about the future whether prompted by global economic developments and/or domestic political circumstances may have caused Irish consumers to re-assess the extent to which their personal financial circumstances could be threatened by a macroeconomic climate that might not generate significant ‘financial space‘ for Irish households.
In this context, there is a notable difference between last month's survey results for Ireland and those for the Euro area. The comparatively sharp decline in the household finances component relative to that of the broader economy in the Irish sentiment survey was the opposite to that seen in the Euro area confidence survey last month where personal finances were not hugely affected by a much poorer economic outlook. This may reflect notably different experiences through the recent crisis when Irish households suffered far sharper declines in spending power than their counterparts in most other European countries. In turn, this suggests that Irish consumers don’t feel they have sufficient financial capacity to withstand any renewed deterioration in the economic environment relevant to them whereas their counterparts in many other countries feel they have sufficient wherewithal to weather any 'macro' storms. The still substantial legacy of the crisis means current risks translate far more readily into worries about household finances in Ireland than elsewhere.
As is usually the case after Christmas and new year spending, consumers‘ buying plans were scaled back in February but the monthly decline in this element of the survey was relatively modest. This suggests consumer spending should continue to increase but it hints that the pace of growth may not pick up much in early 2016. In this respect, the February survey hints at an Irish consumer who is focussed at present on the many uncertainties that might weigh on their living standards and, as such, altogether more conscious of the risks rather than the recovery at present.
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.