Irish consumer sentiment weakened slightly in March

• Sentiment Marginally Weaker In March But Trend Still Modestly Positive.

• Expected Pull-Back In Buying Climate The Main Driver.

• Pressure On Personal Finances Continues To Curb ‘Feel-Good’ Factor.

• Optimism on Jobs Outlook Increases Further….

• …But Views on Economy Marginally More Cautious.

Irish consumer sentiment weakened slightly in March—a not entirely surprising result given somewhat better than expected readings in the two previous months. In spite of last month’s setback, our sense is that confidence is still set on a modestly improving trend. However, the March results emphasise that the mood of Irish consumers is still fragile and they are not seeing broadly based improvements in their financial situations that would cause both sentiment and spending to move onto notably stronger trajectories.

The KBC Bank/ESRI Consumer Sentiment Index slipped to 83.1 in March from the near seven year high of 85.5 posted in February. Last month’s drop was the first since November and, as such, likely reflects the normal ebb and flow that might be expected in these data in the absence of an overwhelming force pushing sentiment in one or other direction. It remains the case that the broad trend in sentiment is positive of late. The three month moving average of the index which provides one measure of this trend rose for the eleventh month in a row in March suggesting the mood of Irish consumers has improved materially this period.

The pick-up in sentiment through the past year primarily reflects an easing in fears in relation to the Irish economy which has begun to feed through to the expectation of stronger household finances and thereby supported the buying climate. However, while the vicious cycle of fear and falls in activity and employment appears to have been broken, we still seem some distance from circumstances in which increases in confidence and spending power are mutually reinforcing.

The pull-back in Irish consumer sentiment in March was somewhat at odds with the direction of movements in similar indicators elsewhere. Admittedly, the US measure closest in format to the Irish index—the sentiment survey compiled by the University of Michigan—also fell last month, but other prominent US confidence data pointed in a notably more positive direction. Inconsistencies in US sentiment indicators of late may reflect the difficulty US consumers are having in disentangling the impact of severe weather on a number of disappointing recent economic releases. However, the uncertainties facing Irish consumers appear to be more fundamental in nature.

March saw a strong rise in Euro area consumer sentiment and a similarly notable gain in the corresponding UK measure. It should not be expected that the trend in these indicators would be identical across countries and their inherent monthly volatility also argues against reading too much into one month but it still seems likely that the drop in Irish consumer sentiment in March was primarily driven by domestic rather than global factors.

Our sense is that the small drop in Irish consumer sentiment in March largely reflects a normal and possibly overdue correction in the index. However, the details of the survey hint that other factors may also have played some role. The March results saw three of the five main components of the survey decline with the other two rising.

The weakest element of the March results was the buying climate. This was not surprising. As noted previously, this element of the survey has been stronger than expected of late and, consequently, some correction was anticipated. Even after the pull-back in March, this aspect of the survey is still pointing to stronger spending plans relative to the pattern of recent years. Some 34% of consumers regard now as a good time to buy ‘big ticket’ items against 23% who regard it as a bad time to buy such items.

This result may appear somewhat at odds with the sluggishness seen in recent retail sales data. However, given ongoing pressure on household finances it may be that spending is being concentrated on ‘big ticket’ items such as cars, electrical equipment and propertyrelated outlays with offsetting restraints on spending in other areas. This view would be broadly supported by the sectoral breakdown of retail sales of late through the past three months. In any event, the particular phrasing of this question which asks ‘is now a good time to buy “big ticket” items?’ is such that it is unlikely to throw up a one for one correspondence with the same month’s retail sales.

Notwithstanding the pull-back in the buying climate in March, our sense is that the recent trend in this element of the survey suggests Irish consumers may be more willing to spend of late. Unfortunately, other elements of the survey relating to household finances raise questions as to whether they will be able to step up their spending.

The March reading saw a deterioration in consumers’ assessments of the trend in their personal finances through the past twelve months. Only 9% reported an improvement while 54% reported a worsening of their household finances. This is entirely consistent with the negative impact of Budget 2014 together with ongoing weakness in incomes as signalled in official earnings reported through the survey period.

More encouragingly, consumers were a little more positive in relation to the likely trend in their spending power in the next twelve months than in February. Our guess is that this owes something to the emerging turn in the housing market as well as speculation about less painful fiscal policy in coming years. That said, it should be noted that just 20% of those surveyed see their household finances improving in the next twelve months compared to 35% who see a further decline Slight Drop In Consumer Sentiment Doesn’t Seem To Signal Change In Mood 7 April 2014 4 in their spending power.

The March survey also shows a further improvement in Irish consumers’ views of the jobs market. 45% of those surveyed see unemployment declining in the coming year compared to 26% who expect joblessness to rise. These results are effectively the reverse of those reported in March 2013 when 46% of respondents were negative and 20% were positive. This represents quite a change in thinking on job prospects in the past twelve months. Of course, this improvement is grounded in some very encouraging news on jobs in the interim. The survey period saw a number of positive developments in this regard; there were very impressive employment data for the final three months of 2013 as well as an array of new job announcements and a drop in numbers on the live register below 400k for the first time in almost five years.

A somewhat surprising aspect of the March survey was a deterioration in sentiment towards the general outlook for the Irish economy. It should be emphasised that this weakening was fairly modest and comes after a very sharp improvement in this aspect of the survey since last autumn. Moreover last month’s reading still shows twice as many consumers think the Irish economy will improve in the next year as think it will worsen. So, it should be emphasised that views on the Irish economy remain quite positive.

With sentiment indicators in other economies generally improving, we looked at a number of domestic developments that might offer some explanation for the slightly poorer March out-turn. Unexpectedly poor GDP growth data for the final quarter of 2013 were released towards the very end of the survey period and a few days earlier considerable media coverage was given to a warning by the economist, Morgan Kelly, in relation to problem loans in Ireland’s SME sector.  A quick analysis suggests some deterioration in views on the economic outlook had become established in responses given before these developments. However, there was some additional weakening through the final portion of the survey period.

It would appear that the modest change in thinking on economic prospects through the survey period stems largely from a decline in positive views rather than an increase in negative views. In very broad terms, the March survey results hint that consumers sense things may be getting better but because relatively few consumers are seeing their spending power increase, the recovery still seems remote from their circumstances. This means that consumers need repeated reassurances that the Irish economy is moving onto a recovery footing and any indications to the contrary tend to affect their outlook.