The KBC Bank Ireland/ESRI Consumer Sentiment Index fell to 61.

• Marginal decline doesn’t appear to signal a reversal of a recent (modestly) improving trend.
• Fragile Irish economy means straight line improvement in sentiment can’t be expected.
• Fiscal referendum uncertainty may have increased uncertainty among consumers.
• Expectations for jobs and household finances improved slightly.

The KBC Bank Ireland/ESRI Consumer Sentiment Index fell to 61.0 from 62.5 in April. This was the first monthly decline since December.  At this stage, the May results don’t seem to signal a change in trend. The 1.5 point drop in the Index between April and May has to be seen in the context of the 3.3 point average monthly gain seen thus far in 2012. So, last months decline was relatively modest. It should also be noted that the underlying trend in consumer sentiment, as measured by the three month moving average of the series, increased slightly in May to 61.4 from 60.1.

We don’t think the May reading signals a dramatic shift in thinking among Irish consumers. Instead, it emphasises the fragile and patchy nature of what is a fairly tentative turnaround in Consumer sentiment and in the broader Irish economy. As we noted last month, the Irish economy lacks any clear positive driver that would produce broadly based forward momentum. This means we couldn’t really expect to see a sustained straight-line increase in the sentiment index. So, the May reading seems to be an almost inevitable correction following improvements in sentiment in each of the previous four months. In addition, the May reading likely reflects renewed concerns about the Euro area as well as increased uncertainty ahead of the recent referendum on the fiscal treaty.

The slight weakening in Irish consumer sentiment in May appears to largely reflect domestic influences as similar indicators for many other countries rose in May. The broad array of US indicators of consumer confidence produced mixed results but the closest counterpart to the Irish measure; the sentiment index compiled by the University of Michigan, registered a modest gain that was enough to bring it to its highest level in four years. European Consumer confidence also rose marginally in May with just over half of the countries in the EU 27 reporting a brighter mood among their households although consumers in Italy, the Netherlands and Spain reported notably lower confidence levels than a month earlier. Poorer readings for these countries probably reflect increased concerns about the impact of notably tougher budget policy on household finances. 

The details of Ireland’s May Consumer sentiment survey show three of the main components weakened compared to April while the other two improved. This mixed result mirrors the pattern of recent months. It also argues against reading too much into the decline in the overall index in May. None of the monthly changes was dramatic but the sharpest drop in the sentiment survey was seen in relation to the general economic outlook. This probably owed something to increased nervousness about the possible consequences of a deteriorating situation in the Euro area. Similar concerns were also evident in Consumer sentiment readings for Spain, Italy and the Netherlands. However, Consumer views on economic prospects improved in May in a wide range of countries as diverse as Germany and Greece. This suggests domestic factors played some role in altering the views of Irish consumers and their counterparts elsewhere about the economic outlook during May. 

It could be argued that the major domestic economic development in Ireland during the survey period was the referendum on the fiscal treaty.  This could have contributed to poorer Irish Consumer sentiment in May in a number of ways. First of all, for many consumers the subject matter of the referendum may have seemed extremely complex, somewhat obscure and largely technical in nature. That, in itself, could have increased uncertainty. A further and possibly more important influence was the tone of much of the debate ahead of the vote which appeared to centre on the risks associated with one or other outcome. In circumstances where many consumers might have felt that they were damned if they did and damned if they didn’t, it is not entirely surprising that this translated into a somewhat more negative view of the outlook for the Irish economy.

It is not possible to say definitively what role the debate ahead of the fiscal treaty referendum played in the weakening in Irish Consumer sentiment in May. However, the view that it played some role is supported by responses given to other questions in last month’s survey. If, independent of the referendum, there had been a wide ranging and fundamental downgrading of economic prospects by Irish consumers, it might be expected that they would also have marked down their views of the outlook for jobs or for their own household finances. However, both of these elements showed month-on month improvements in May.

The jobs element of the May sentiment survey was particularly encouraging. While Irish consumers remain cautions about the employment situation, the increasing frequency of new jobs announcements of late and signs of a stabilisation in the live register seem to have prompted a less negative assessment of the outlook for jobs. As a result, the number of consumers expecting a further rise in unemployment in the next twelve months dropped to just below 50% the first time this has happened since January 2007.

The answers given to the two survey questions on trends in household finances also argue against a marked change in Consumer thinking in May. There was marginal improvement in consumers’ assessment of the outlook for their household finances in the next twelve months but this was too small to be significant. Forward-looking views of household finances were also more positive than consumers’ views on how their personal finances had developed in the previous twelve months. So, it doesn’t seem that there was any marked change in consumer thinking in regard to personal financial prospects last month. This too supports the views that special factors contributed to the weaker reading in relation to the broad economic outlook.

It remains the case that roughly one in three consumers expect their spending power to weaken in the year ahead compared to just one in ten that expect an improvement. So, pressure on household finances is expected to persist. Reflecting this, consumers also marked down their assessment of the buying climate although this may partly reflect a need to pare back outlays ahead of holiday related spending commitments.

Providing Irish consumers aren’t swept away by sporting euphoria (or gloom) this month, the June survey results will probably confirm a picture of a consumer who has become slightly less fearful of late but still faces substantial financial pressures. In addition, the troubling combination of uncertainty in relation to European economic prospects and the near inevitability of continuing pressure on household finances mean Irish consumers will remain cautious. Even taking into account the slight drop seen in May, it seems that consumers’ concerns are slowly easing.  However, the May data emphasise the continuing absence of a ‘feel good’ factor that would spark a substantial improvement in consumer sentiment and spending.