Ukraine and inflation fears hit Irish consumer confidence hard in March

  • Irish consumer sentiment sees sharpest monthly drop in two years

  • Broad economic outlook and prospects for personal finances weaken most

  • Jobs outlook and spending plans more resilient…

  • ….could fear of higher inflation bring forward spending temporarily?

  • Inflation surge marks substantial change in Irish consumers financial circumstances. We estimate economy-wide hit of over €4bn or about €2k per household

  • Special survey question suggests 85% of consumers will cut back on their planned spending in 2022..

  • …. with 49% indicating a ‘significant’ adjustment is likely 


Irish consumer sentiment tumbled in March as the tragedy unfolding in Ukraine and the related economic and financial fall-out facing Ireland struck a very gloomy note with Irish consumers. The March survey saw  a sharp worsening of the general economic outlook and a similarly large weakening in consumers thinking on the prospects for their own household finances that likely reflects notably increased inflation fears.

The KBC Bank Ireland consumer sentiment survey fell to 67.0 in March from 77.0 in February. That 10 point decline in the index was the largest month-on-month drop since a much larger fall in April 2020 when the first wave of Covid-19 saw severe health-related restrictions effectively close down large swathes of the Irish economy. The immediate and far-reaching changes in domestic economic conditions in the spring of 2020 prompted a 34.7 point drop in the sentiment index in the April reading that year, far and away, the largest monthly decline in the twenty-six year history of the index. 

Although the weakening in Irish consumer confidence in March 2022 is notably smaller than that seen two years ago, only ten months out of twenty six years have seen larger drops. So, the March sentiment survey signals a marked change in thinking and suggests a material downgrade of the economic and financial outlook by Irish consumers.

As the diagram below illustrates, the nature of the forces weighing on sentiment at present means consumer confidence is also tumbling in most economies. Indeed, the particular significance of fuel prices to the financial circumstances of US households means that the downward trajectory of consumer sentiment in the ‘States has run ahead of that in Ireland of late. Euro area consumer confidence took an even larger tumble than the Irish measure this month - the balance dropping from -8.8 in February to -18.7 in March, which represents the second largest fall on record after a slightly bigger 10.5 point drop between March and April 2020.


Although Irish consumer sentiment weakened markedly in March, the detailed data show notable differences in responses to the five main areas of the survey. In itself, this might suggest that Irish consumers are not currently seeing events in Ukraine as posing overwhelming downside risks-the outlook is judged to be awful rather than apocalyptic at present.

The sharp downgrade to the outlook for the Irish economy is entirely understandable. Only one in eight now see the Irish economy strengthening in the next twelve months, about half the number that expected this in February while the number expecting the economy to weaken increased from one in two consumers to two in three. Although this represents a substantial change in thinking it remains markedly less negative than the near universal expectation of economic weakness that was seen in the sentiment survey when Covid-19 first struck.

Mechanically, weaker economic conditions could be expected to translate into a poorer outlook for jobs and there was a swing from a clearly positive employment balance in the February sentiment survey to a significant negative balance in March. However, as a comparison between March ’22 and March 21 readings illustrates (see table above), the change in consumer thinking in relation to employment was less marked than in relation to economic activity.  This hints that consumers may be responding to a continuing sequence of positive news in regard to the Irish jobs market that they think will counter the impact on employment of events in Ukraine to some degree.

While the difference between consumer thinking on the general economic outlook and the prospects for jobs might be described as one of tone, variations in the responses in relation to thinking on household finances were much more significant and potentially signal a notable change in consumer thinking on their financial circumstances and the longer term outlook for inflation.  

Not surprisingly, a torrent of bad news on living costs caused consumers to downgrade their assessment of their personal financial circumstances through the past twelve months but the change was relatively modest compared to their thinking on the outlook for the next twelve months which saw a marked worsening. Consumers were notably more pessimistic in relation to the prospects for their household finances in the year ahead with negative responses outnumbering positives by over 4 to 1 in March compared to  just under 2 to 1 in February. 

The similar tone to responses in relation to the outlook for the Irish economy as a whole and prospects for household finances is consistent with the notion that the primary channel through which the Irish economy would be affected by the Russian invasion of Ukraine would be through a painful boost in living and business costs (as we suggested in  our  'stepdown in Irish economic growth looking increasingly likely' 04-03-22 ).

With the difficulties posed by sharply higher inflation now seen as weighing heavily on both  ‘macro’  and ‘micro’ prospects, it was somewhat surprising that consumers spending plans showed a marginal improvement in the March sentiment survey. Although we can’t rule out the possibility that this is simply a ‘rogue’ answer that reflects statistical noise and could quickly be reversed, the comparatively positive reading in this element of the survey could also owe something to specific factors that may have a bearing on the outlook for consumer spending through the remainder of 2022.

One possibility is that in spite of the much darker influence of events in Ukraine on the outlook for household finances, that there is still some material spending capacity on the part of Irish consumers courtesy of buoyant jobs growth as well as increased household wealth courtesy of increased asset prices, lower borrowing and elevated deposits. The onset of an extended St Patricks weekend and the approach of Easter may also have underpinned spending plans. On this view, the likely adjustment to consumer spending as a result of higher inflation could prove reasonably contained.

A more negative interpretation would suggest the resilience of spending plans in the March survey could be the result of an increased inclination to buy now before prices rise further.  Through most of the past decade, Irish consumers became increasingly price-conscious and adapted their spending patterns to notably more frequent special offerings by retailers and other consumer-facing businesses.

In many instances, in an Irish economy where inflation averaged just 0.6% per annum between  2011 and 2020, Irish consumers were focussed on falling rather than rising prices; food prices fell by 0.9% on average each year and clothing prices dropped an even larger 2.2%. This means that emerging price trends represent a dramatic change in the financial conditions facing Irish consumers.

In turn, the March survey results probably represent the first time that an inflation surge has undermined Irish consumer sentiment for several decades- Sentiment proved resilient to rapid inflation in the early 2000’s because that inflation was primarily driven by booming domestic demand and an associated surge in nominal incomes. At least in the initial stages, an external cost-push driven bout of inflation is altogether different and more damaging to consumer confidence than a domestic demand-driven step-up in price pressures.

For most of the past decade, very limited inflation has meant the purchasing power of Irish households increased with even modest income gains. So the prospect of  a marked squeeze on spending power from higher inflation in 2022 coupled with the war in Ukraine a sea-change in circumstances for the average Irish household.

Quantifying such pressures is made very difficult by the exceptional volatility in commodity prices at present as this makes the precise rate of inflation likely to prevail through 2022 unusually uncertain. Using the current KBC Bank estimate of an average annual inflation rate of 6% in 2022, we estimate that the step-up in inflation between 2021 and 2022 will drain around €4bn from consumer spending power this year, implying a hit to the average household of just over €2k.  Although some element of this may be compensated by faster income growth to varying degrees across the spectrum of consumers , many are likely to face a drop in ‘real’ living standards this year.  

>Special survey question; How will Irish consumers respond to higher living costs and increased uncertainty?

The exceptional nature and scale of changes in the spending power of Irish households finances means it is worthwhile to examine how consumers may respond.  For this reason, we asked consumers to indicate whether inflation and/or fear would lead them to alter their spending in 2022.

The table below sets out the responses given a question asking about possible adjustments to Irish consumer spending in 2022. It should be noted that the wording of the question means responses reflect changes to planned spending. So, the reductions to planned spending could still mean consumer spending would be higher in 2022 than in 2021 (but a smaller gain than previously envisaged).

Will consumer spending be slower in 2022? (March sentiment survey special question)

I will reduce my spending significantly because of higher energy and other costs


I will reduce my spending slightly because of higher energy and other costs


I will reduce my spending significantly because of greater uncertainty/caution


I will reduce my spending slightly because of greater uncertainty/caution


I will reduce my spending significantly because of higher energy and other costs and because of greater uncertainty/caution


I will reduce my spending slightly because of higher energy and other costs and because of greater uncertainty/caution


There will be no significant impacts on my spending


I am unsure / don't know





Significantly, while 7% of consumers are unsure and a further 8% suggest they will not alter their spending, some 85% of consumers expect to curtail their spending in as a result of higher inflation and increased uncertainty. More than half of this group or 49% of consumers overall say the adjustment will be ‘significant’ rather than slight.  So, a changing environment is prompting a clear adjustment in the outlook for Irish consumer spending.

The most powerful negative influence on spending at present is higher inflation, with just under half of consumers (46%) citing increased energy and other costs as a constraint on their spending and the majority of these (27% of overall responses) signalling a significant adjustment. So, the hit to spending power is the main factor likely to weigh on Irish consumer spending in 2022.

Although the direct impact of higher living costs is set to be the largest constraint on household  spending in 2022, some 39% of consumers also cite increased uncertainty as a factor that will curb their spending in 2022. The size of this ‘precautionary’ effect could be an important driver of the health of sentiment and spending in coming months.

A sizeable one in four consumers say that the combination of higher costs and increased uncertainty will temper their outlays while a somewhat smaller one in seven (15%) consumers say that greater uncertainty alone will limit their spending in 2022.    

Not surprisingly, the proportion of consumers indicating a ‘significant’ adjustment in spending because of higher costs is more than twice as great among those saying they currently make ends meet with difficulty as it is with those making ends meet with ease. In the same vein, those indicating they are currently getting by comfortably are three times more likely to indicate they don’t plan to alter their spending in 2022 as those who say they are already struggling. So, the financial hit from rising inflation is not being evenly felt.  As we previously indicated,  this emphasises a need  for a targeted policy response.

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.