Irish consumer sentiment posted a decline

• Sentiment index slips to weakest level since June.

• Drop at odds with largely encouraging ‘macro’ news through survey period.

• Several factors could have played some role.

• October drop might be a statistical ‘blip’.

• Fall may reflect uneven nature of emerging Irish recovery.

• Consumers could be highlighting concerns in relation to water charges and possibly even proposed changes to lending.

Irish consumer sentiment posted a surprising and substantial decline in October. The KBC Bank Ireland/ ESRI Consumer Sentiment Index fell to 85.5 in October from the near eight year high of 92.8 recorded in September. We can’t find a fully conclusive reason for this deterioration.

Our sense is that concerns in relation to water charges and perhaps even increased deposit limits could have played some role but it is not clear that these would account adequately for either the scale or breadth of the drop seen in the sentiment index in October. The survey was largely completed before the Budget on October 14th but, in marked contrast to recent years, most pre-budget commentary was not warning of impending pain. So, this shouldn’t have weighed on sentiment last month.

It is possible that the October results are simply a statistical ‘blip’. Such an outcome is made more likely by the particularly volatile and still somewhat uncertain circumstances facing the average Irish consumer. To the extent that the October results simply reflect sampling volatility, a sharp rebound should be expected in the November results. However, the results are also consistent with many consumers’ experience of a recovery that they hear and read to be very healthy but one which they are not feeling in their personal finances.

The drop in Irish consumer sentiment in October is the second largest monthly decline in the past twenty two months and bears many similarities to the slightly larger 7.8 point drop in the index seen in May. As we noted then, declines of this sort might typically be expected to occur about once every couple of years. So having two in only six months is quite surprising.

Our judgement was that the decline seen in May didn’t represent a marked change in the circumstances of Irish consumers and we would be inclined to view the October sentiment reading in the same way. Our sense is that sampling vagaries and volatile circumstances played some role in both episodes leading to an exaggerated decline in the index in May and again in October.

We also felt that the poorer May sentiment result was consistent with some deterioration in the mood of consumers at that point that was also reflected in the local and European election results. It may be that similar developments were at play in October. A notably increased focus on water charges of late has crystallised concerns in relation to continuing pressures on household finances. At the margin, the risk that new Central Bank proposals on mortgage lending could have some adverse consequences for the property market may also have weighed on sentiment in October.

Drop In Sentiment At Odds With Other Economies

The weakening in the Irish Consumer Sentiment Index in October was not prompted by global economic developments. The corresponding US measure rose to its strongest level since March 2007 while Euro area consumer confidence rose unexpectedly for the first time since May. UK consumer confidence did fall marginally last month on a somewhat poorer economic outlook but that measure did not show the scale of change evident in the Irish index. It is clearly the case that the European economic outlook is troubling but there is little to suggest that it warranted a major change in the thinking of Irish consumers in October.

The decline in the Irish Consumer Sentiment Index in October (as in May) was broadly based with all of the five main elements of the survey lower than their September readings. With the exception of expectations on the jobs market, which weakened only marginally, all components recorded similarly sharp rates of decline between September and October.

Most Economic News Through Survey Period Was Encouraging

By and large, the economic news through the survey period was fairly positive. The Central Bank, the ESRI and IBEC were among those releasing notably more positive growth forecasts for 2014 and 2015 while it was announced that a deal to repay IMF borrowings and thereby cut Government borrowing costs had been agreed. While all but 50 of the 810 responses were taken before the Budget was presented on October 14th, most pre-budget speculation centred on how generous rather than how onerous the budget might be. So, our sense is that this should have provided some support to sentiment.These developments might have been expected to produce an upgrading of consumer views on the Irish economy in October but instead there was a notable deterioration.

To a significant extent, the drop in this element of the survey last month simply reversed the gains of the previous month. Even after this decline, it remains the case that a majority of consumers (53% of those surveyed against 58% in September) expect the Irish economy to improve in the coming year. That said, the fact that a non-negligible number (19% against 11% the previous month) envisage a weakening in economic conditions in the next twelve months testifies to what is still a very uneven recovery, particularly in terms of its impact on consumer spending power at present.

Household Finances Remain A Concern

Irish consumers were notably gloomier about their personal finances in October. While the number anticipating an improvement over the next twelve months was unchanged at 19%, there was a significant rise in the number of consumers expecting deterioration in their household finances from 31% to 39%- the highest number since June. This element of the survey has thrown up consistently negative balances in recent years- the last time more respondents anticipated stronger rather than weaker household finances was in May 2007. Persistently negative balances in this element of the survey of late through a recent period of improving ’macro’ news emphasises the continuing pressure on the financial situation of many households.

Additional Worries In October?

It can’t be excluded that the sentiment survey is capturing notably increased concerns of late in relation to the introduction of water charges. In turn, the focus on water charges may be acting as a touch stone for a wide range of factors that imply continuing financial difficulties for many Irish consumers.

Another potential influence on this element of the survey could be the announcement during the survey period of Central Bank proposals to introduce upper limits on loan-to-value and loan-to-income ratios for mortgage borrowers. Regardless of the rationale for these measures, it may be that some consumers saw these proposals reducing their access to the housing market and increasing the need to cut spending in order to save. In the course of an examination of the sentiment data this month, it became clear that there was a deterioration in the survey responses in the week the Central Bank consultation paper was published. This could be a coincidence or it may be that the proposals also added a significant element of uncertainty to the outlook for the Irish property market in the coming year.

We cite water charges and new lending rules as potential influences on the October consumer sentiment reading because these issues attracted significant media coverage through the survey period and, consequently could have had some impact on the sentiment index. To get another perspective on whether they might have contributed to changed consumer thinking, we also used Google Trends to examine whether these topics attracted increased attention. We looked at the frequency of searches for the terms ‘water charges’ and ‘mortgage deposit’ in Ireland and benchmarked these against a number of other economics-related phrases. Both of these terms saw sharp increases in the number of searches during October. While we would be cautious in drawing strong conclusions from this approach, it does provide some Sharp Drop In Irish Consumer Sentiment Not Easily Explained4 November 2014 5 circumstantial evidence that these issues received increased attention of late.

Not surprisingly, a generally weak sentiment survey saw consumers also downgrade their assessment of the buying climate. While the drop in this element of the survey was marked, we would also note that it can be quite volatile. The poor October reading likely reflects strains on household finances but it could also owe something to the hiatus between summer holiday / back to school spending and the looming demands of Christmas on pockets and purses.

Causes Of October Sentiment Drop Should Become Clearer In Time

As noted above, we don’t feel we can fully explain the sharp deterioration in Irish consumer sentiment in October. We think several factors could have played a role either as a partial or sole explanation. First of all, it is possible that the drop in the index is purely a statistical ‘blip’ that follows from an occasional tendency for economic series to throw up outliers that don’t signal a change in trend. If that is the case, we would expect to see the October fall largely reversed in the November results.

A second and possibly related explanation is that the October results merely reflect the uneven nature of the emerging recovery and its somewhat erratic depiction in many of the conventional economic indicators. As the average Irish consumer may feel somewhat removed from the upswing, corrections to sentiment such as that seen in October are almost inevitable. Again, if this were the dominant factor, one might expect this to be significantly reversed in November.

A final possible explanation is that the October survey period contained one or more ’events’ that served to crystallise deeper concerns about on-going financial pressures facing many households. If this is the key factor, one might expect lacklustre readings in the months ahead. This makes getting policy interventions right and communicating their rationale clearly all the more important if a still unbalanced Irish economic upturn is to broaden and become more sustainable.