Small Drop In Consumer Sentiment Hints At Growing Uncertainty And Unease

• Marginal drop in Irish consumer sentiment in September primarily driven by Irish-specific influences rather than global factors
• Sentiment still reasonably positive overall but Irish consumers more unsure
• ‘Macro’ elements of survey weaken while household finances readings are mixed
• EU Commission Apple ruling likely increasing uncertainty and unease of average Irish consumer
• Looming Budget and limited income gains may also be affecting confidence

Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland

Irish consumer sentiment slipped slightly in September. While the marginal change in the sentiment index is probably best seen as signalling no substantive change in the mood of Irish consumers last month, the details hint at an uptick in uncertainty and nervousness on the part of Irish consumers.

Responses given in September to a number of the key questions in the sentiment survey suggest that Irish consumers are having difficulties making sense of an increasingly unclear economic outlook. In recent months, developments such as the UK’s Brexit vote and the outsized 26% jump in Irish GDP have made it notably harder for the average consumer to assess the implications for them of unfolding economic news.

The September survey period saw what from the perspective of the average Irish consumer was yet another ‘unknowable unknown’ emerge in the shape of the EU Commission ruling that Ireland had given illegal state aid to Apple.  Although the sentiment details do not suggest any sea-change in the thinking of Irish consumers, the concentration of the monthly drop in elements of the survey related to the ‘macro’ climate hints that concerns in relation to the Commission’s finding may be weighing on confidence.

The KBC Bank Ireland/ESRI consumer sentiment index edged lower to 102.0 in September from 102.7. The small scale of the monthly decline implies no statistically significant change from the August reading. Moreover, the index is effectively unchanged from the September 2015 reading.

At one level, the headline results might seem to point towards an element of stability in Irish consumer confidence. However, an arguably more notable feature of the sentiment index of late is the ‘choppy’ nature of monthly readings. For the last six months, the index has not moved in the same direction in two consecutive months.

It should be emphasised that the current level of the sentiment index is consistent with a reasonably positive assessment of economic and financial prospects by Irish consumers. However, in view of the improvement in employment and incomes thus far in 2016, it might have been expected that sentiment would show clearer and consistent gains. Instead, see-saw monthly fluctuations in sentiment appear to indicate a measure of unease on the part of the average Irish consumer.

The drop, albeit marginal, in Irish consumer sentiment in September was at odds with developments in comparable sentiment measures for the US and the Euro area as a whole, while in the UK consumer confidence posted a notably stronger than expected gain to recover all of the ground lost in the wake of the Brexit vote. The behaviour of these consumer metrics in other countries hints that domestic, or to be more precise Ireland-specific rather than global developments, prompted the slip in Irish consumer confidence last month.

Both of the ‘macro’ elements of the Irish consumer sentiment survey posted significant but not substantial declines in September.  The announcement of the European Commission ruling on Apple and the Irish Government’s decision to appeal this ruling likely affected responses to the sentiment survey. However, for a range of reasons, it would not be expected that the impact would be altogether clear-cut.

Clearly, the amounts involved in the EU Commission’s Ruling, cited at €13bn is extremely large in terms of the Irish economy, as it is the equivalent of around 30% of tax revenues or 14% of consumer spending in 2015. In this sense, consumers would clearly be aware of the ruling as a major development. However, the timing, nature and extent of any consequences that might follow for the average consumer remain unclear.

The immediate judgement of Irish consumers on this topic would also have been affected by a high profile series of claims and counter claims through the survey period. At the extremes, these ranged from suggesting the Government would have ready call on funds that would resolve a host of social and economic problems to warnings about the looming collapse of the Irish multinational sector.

The September survey produced a clear decline in consumers’ assessment of the general economic outlook and a more limited revision to thinking on job prospects. We interpret these results as signalling increased uncertainty and a greater measure of unease on the part of Irish consumers rather than any dramatic change in their thinking.

It should be noted that positive views on the economic outlook still outnumber negative views by just over two to one. However, the September survey saw the share of consumers who expect the Irish economy to weaken in the next twelve months rise to the second highest level since mid-2014 (the July 2016 survey in the immediate aftermath of the UK Brexit vote was the poorest in this respect).

The three elements of the Irish sentiment survey related to consumers’ own financial circumstances returned mixed readings in September.  The assessment of household finances over the past twelve months improved modestly from a weak August reading. The detailed responses to this question show about half of Irish consumers feel their personal financial situations haven’t changed in the past year. Of the remainder, roughly equal proportions report gains and losses in their household finances. So, there is little sense in these numbers that Irish consumers sense any broadly based improvement in their own circumstances.

Consumers were slightly less optimistic about their financial prospects for the year ahead than they were in August.  This likely owes something to a series of reports downplaying the likelihood of any material boost to household spending power from the upcoming Budget. In addition, a number of high profile industrial relations disputes of late have served to highlight both the depth of feeling about current pay levels and the difficulties in resolving claims for increases.

In turn, consumers were slightly less positive in their buying plans in September. At the margin, this may owe something to increased unease about the ’macro’ outlook but it probably owes more to some belt-tightening in the aftermath of summer holiday spending  and as seasonal pressures  such as the beginning of the school year make additional demands on household budgets.

Overall, the September consumer sentiment survey suggests no dramatic changes in the ability or willingness of Irish consumers to spend of late. As such, it remains consistent with continuing solid growth in consumer spending. However, the details of the index also suggest some increase in nervousness that may act as to restrict any further acceleration in household spending. While issues such as the Apple ruling are unlikely to be resolved any time soon, the sentiment survey emphasises the need for the upcoming Budget to gently support rather than shock Irish consumers.

Press release

Commenting on the results Daniel Foley, ESRI, said:

“Consumer sentiment has fallen moderately this month, suggesting that consumers are feeling cautious, particularly in relation to future economic conditions. The results for the main index show that the upward trend observed over the last year has begun to level off in recent months indicating that consumers are becoming more aware of the downside risks facing the economy.”

“The dis-improvement in consumer’s expectations this month is being driven mainly by falling sentiment in relation to the general economic climate and future employment prospects. The component relating to future unemployment fell by 2.3 index points this month.”

“The index of current economic conditions was the only index that improved over last month increasing by 1.7 index points. Perceptions of the buying climate worsened this month; however there was an improvement in consumer’s view of their personal financial situation compared to twelve months ago. This component was the primary driver of the of the improvement in the index this month, increasing by 5.9 points."

In addition, Austin Hughes, KBC Bank Ireland, noted:

"The marginal drop in consumer sentiment suggests there was no significant change in the mood of Irish consumers last month and that confidence in Irish economic prospects and consumers’ own personal finances remains reasonably positive. However, the fact that sentiment has not materially improved through the past year on foot of rising employment, a less painful Budget stance and some pick-up in incomes-albeit modest and uneven also hints that uncertainty and unease about the future may be building."

"We think the EU Commission ruling that Ireland gave illegal state aid to Apple may have weighed on sentiment in September. Claims and counter-claims about a quite technical issue may make it difficult for the average consumer to establish exactly when, in what way and how much this issue will affect them. However, a downgrading of the economic outlook for the next twelve months suggests a concern that risks to the Irish economic recovery have increased of late."