Consumer sentiment slips in May as risks remain and income gains disappoint

Sentiment Survey Suggests Conditions Slightly Better But Irish Consumers Aren’t Seeing A Boom

• Marginal monthly drop enough to prompt weakest reading since December
• Uncertain economic outlook and disappointing household finances key drivers
• Sense of growing disappointment emerging on lack of income gains

Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland

Irish consumer sentiment weakened slightly in May on nagging uncertainty about the economic outlook and continuing concerns about personal finances. The current level of the sentiment index suggests Irish consumers remain modestly optimistic but the lack of clear positive momentum in the survey strongly hints that the economic recovery is falling well short of consumers’ expectations in terms of delivering a material boost to their living standards.

The KBC Bank Ireland/ESRI consumer sentiment index fell marginally from 102 in April to 100.5 in May but that drop was sufficient to bring the index to its lowest level since December 2016. We wouldn’t exaggerate the significance of the latest monthly fluctuation but the broader softness of recent readings does seem at odds with the strength of many other short term Irish economic indicators.

However, the tone of the sentiment survey may be consistent with that of lacklustre income tax receipts or weakness in new car registrations.  Together, these suggest that while Irish economic conditions are improving, this is not translating into broadly based and palpable gains in consumers’ financial circumstances. In turn, this means that sentiment and household spending lack a feel-good factor that would encourage sharper increases in these areas.

The slight drop in Irish consumer sentiment in May contrasted with gains in similar indicators elsewhere. In the US, a fractional improvement concealed sharp differences in consumers moods dictated by their political affiliations. In the Euro area, a modest monthly gain was driven by encouraging ‘macro’ developments that more than offset a slightly more negative outlook for household finances. This proved enough to push consumer confidence to its strongest level since July 2007. In the UK, a surprising gain was attributed to a less severe than feared deterioration in household finances-a development that may also be linked to the decision to call a snap general election.

A brief look at influences and outcomes in respect of consumer confidence readings in other geographies might lend credence to the view that it is better to travel hopefully than to arrive. In the case of the US, sentiment has been boosted by the expectations of Trump supporters, in the Euro area, the bounce has come from recent if long overdue signs of economic life and, in the UK, what could still prove to be short-lived gains, seem to be the product of a squeeze on living standards that, thus far, is not as severe as some envisaged.

In these other zones, consumers are reacting optimistically to relatively new developments. In the case of Ireland, the survey suggests that optimism is fading. A now long established recovery has failed to deliver anything like the scale or spread of the improvement in financial circumstances that Irish consumers had expected.

The May sentiment reading shows a modest downgrading of the economic outlook in spite of a sequence of generally positive indicators through the survey period. This may be due to increased concerns about a hard Brexit on foot of a vexed start to discussions on the exit process between the UK and its EU partners. In the same vein, inconsistencies in various recent US policy pronouncements emphasised the increased unpredictability of the global outlook.  In turn, these developments spilled over into a slightly weaker assessment of employment prospects in spite of a spate of new job announcements through the survey period.

It may seem strange that Irish consumers are more sensitive to the risk of an economic setback than to the reality of relatively robust growth at present. This is largely a legacy of the recent downturn. In part, this reflects understandable fears. At a more basic level, it’s simply because the current financial circumstances of many Irish households mean they can’t afford not to be nervous.   Some sense of the limited nature of the turnaround in household finances is indicated by the table below.

Just under a quarter of Irish consumers judge that their personal finances improved in the past year and a broadly similar number reported a deterioration in their living standards.  While the outlook for the next twelve months is moderately better, this is largely because fewer consumers anticipate a further weakening rather than any marked increase in those envisaging clearly stronger household finances.

Economists often talk about ‘adjustment fatigue’ to describe difficulties that economies (and the societies that underpin them) might have in sustaining a long period of adjustment. Recent Irish consumer sentiment readings seem to hint at a measure of what we might term ‘frustrated expectations ’ as many households feel they are not seeing any clear reversal of the deterioration they experienced in their circumstances through the downturn.

Such considerations undoubtedly inform the backdrop to the current round of public sector pay talks. They also suggest that ‘fiscal sustainability’ will need to be considered in a broader context than merely adhering to a set of arbitrary and often incoherent statistical rules. This is not to suggest that the sentiment survey results are an argument for irresponsible budgetary policy. It is simply to suggest there are legitimate economic considerations beyond the minutiae of the EU’s fiscal rules.

It is important to emphasise that the current survey reading does not suggest the likelihood of an economic relapse even if it paints a less buoyant picture than many other measures. Some modest improvement in household finances is envisaged in the coming year. More generally, the May Sentiment reading clearly reflects a less threatening environment for Irish households now than a few years ago in the same way that consumer spending power is underpinned by increased numbers at work.

So, current confidence readings are entirely consistent with a growing Irish economy even if the May data point towards some pull-back in spending plans. However, the survey does imply that the upturn in consumer spending may remain constrained as the spread and strength of the improvement in household finances is less than most consumers had envisaged.

PR QUOTES 

Commenting on the results Daniel Foley, ESRI, said

• “Views on the labour market over the next year have fallen marginally since last month down by 0.8 index points despite the monthly unemployment rate continuing to decline. A larger proportion of households expect their finances to improve over the next 12 months suggesting that higher wage expectations are feeding into responses this month. Consumers continue to remain cautious in their expectation of the overall economic climate next year. This component is nearly 10 index points below the June 2016 figure. The lack of recovery of this component suggests that the uncertainty of the economic outlook is still a major concern for consumers.
• “There seemed to be a clear decline in consumer’s views of current conditions this month driven by personal financial worries and a pullback in spending plans. While the majority of respondents remain neutral with regard to improving finances compared to 12 months ago, there was a 3 percentage point increase in negative responses. The results suggest that worries about current financial circumstances are impacting spending plans resulting in the index of current conditions falling by 5.3 index points this month.”

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

• The May sentiment reading hints at an Irish consumer who is more influenced by the risks posed by an uncertain economic outlook than the reality of a string of strong Irish economic indicators of late. This partly reflects painful memories of the recent global downturn but it likely owes more to the fact that continuing pressure on household finances simply means many consumers can’t afford not to be nervous.
• There is a clear sense in these data that many consumers feel the recovery has overpromised and under-delivered in terms of an improvement in their living standards. This is making for a pick-up in consumer spending that is dominated by increases in employment rather than broader income gains. As a result, the rise in spending is still unevenly shared.