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Sentiment slips as global and local concerns weigh on Irish consumers.
Confidence remains on broadly improving trend but consumers still cautious.
Latest Greek crisis likely to have particular resonance for Irish consumers.
Irish consumer sentiment weakened slightly in July. The KBC Bank Ireland/ESRI consumer sentiment index slipped to 99.7 from 102.8 in June reversing much of that month’s improvement. Our sense is that concerns about Greece emphasised the fragile condition of the global economy at present while domestic developments such as the closure of Clery’s department store may have highlighted the still uneven nature of the domestic recovery.
We don’t think the July consumer sentiment reading points to any marked deterioration in the mood of Irish consumers of late. Indeed, the underlying trend as indicated by the three month moving average of the series was effectively unchanged at 100.3 in July compared to 100.0 in June. Our interpretation of the July result is that it points towards an Irish economic recovery constrained by fears and financial pressures that mean a widespread ‘feel-good factor’ is still absent.
The drop in the Irish consumer sentiment index in July was mirrored in a similarly scaled decline in the preliminary reading of the most comparable US sentiment indicator which fell from 96.1 to 93.3 and a somewhat larger fall in the early estimate of Euro area consumer confidence which dropped from -5.6 to -7.1.
The July survey period was marked by a sharp escalation of the crisis in Greece which threatened that country’s exit from EMU. Beyond the general threat of an uncertain future for Europe, the particular resonance for Irish consumers of extremely painful austerity measures in Greece and the seeming inability of European policymakers to agree coherent responses might be expected to have a significant impact on the July sentiment reading for Ireland.
The details of the July survey show a clear downgrading of the economic outlook by Irish consumers. It should be emphasised that the majority of consumers still expect the Irish economy to strengthen in the next twelve months but positive responses to this question slipped to 57% from 65% in June while negative responses increased to 13% from 9%. Our reading of these results is that the continuing fault lines in the Euro area exposed by recent travails in Greece are making Irish consumers more cautious about the general economic outlook by undermining the traditional view that recovery could be expected to build upon itself.
With Irish consumers less optimistic about economic prospects, it is not entirely surprising that they also pared back their expectations for the jobs market in July. We think the high profile closure of Clery's department store could also have contributed to somewhat weaker sentiment in relation to unemployment. Because the average Irish consumer is likely to be altogether more familiar with Clery’s than the names of many of the companies in areas such as technology that are posting significant new job announcements, it would not be surprising if that store’s closure commanded outsized attention. It is also the case that for most consumers in employment, layoffs are likely to resonate far more than new job announcements. Again, it should be noted that the change in sentiment in July in relation to jobs was relatively modest and, overall, consumers expect a further improvement in the Irish jobs market in the year ahead.
While both ‘macro’ elements of the consumer sentiment survey weakened in July, the remaining components focussed on household finances were mixed. Consumers were more negative on the evolution of their spending power through the past year. Fewer than one in five reported an improvement in their personal finances in the past twelve months while more than one in three reported a deterioration. They were also somewhat more cautious about the buying climate in July. These results are consistent with lacklustre retail sales data and underline the absence of any broadly based impetus to household spending power at this point.
The only one of the five main elements of the consumer sentiment survey to improve in July was expectations for household finances over the next twelve months. The number of consumers expecting an improvement in their personal financial circumstances in the coming year increased to 32% from 25% in June while the number expecting a deterioration was largely unchanged at 18%. The contrast between the improvement in these responses and the weakening in other elements of the survey in July may suggest that consumers have specific reasons for their more positive expectations in relation to spending power. Our judgement is that very strong mid-year exchequer returns and various Government comments in relation to the likely thrust of Budget 2016 are likely to have encouraged the view that fiscal policy will be clearly supportive of household finances in the next twelve months.
Overall, our interpretation of the pullback in Irish consumer sentiment in July is that it reflects a recovery that is still emerging but not yet embedded in consumer mind-sets. Our sense is that repeated setbacks, whether in the shape of the latest crisis in Greece or the closure of Clery’s, mean the average Irish consumer is still travelling fearfully rather than fully confident at this point. With Budget 2016 central to prospects for household finances in the next twelve months, striking a balance that ensures that consumer sentiment and spending move forward on a sustainable path may be critical to an upswing in domestic demand in late 2015 and through 2016.
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.