Irish consumer sentiment surprisingly strong In June

• Large monthly rise pushes sentiment to best level since February 2016
• Jump may reflect reduced fears of hard Brexit after UK election result
• Continuing strength in Irish economic indicators also easing fears about economic outlook
• Sentiment on household finances also improves but large majority of consumers still not feeling improvement in their  own finances
• June sentiment bounce consistent with healthy economy but we don’t see further surge

Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland

Irish consumer sentiment showed a surprisingly sharp rise in June to its strongest level in 16 months. The monthly increase may reflect a sequence of positive reports on the Irish economy and a sense that the outcome of the recent UK election may lessen the threat of a ‘hard Brexit’. There may also have been some positive impact from extremely low inflation and the start of summer sales as well as the conclusion to public sector pay talks.

In general, the current level of the sentiment index is reflective of a solidly improving Irish economy. However, in the absence of dramatically positive news on the Irish economy or a significant improvement in household finances, we don’t think the sentiment index is now set on a notably stronger trajectory. Indeed, there is a significant chance of at least a partial reversal of last month’s gain in the months ahead.

The KBC Bank/ESRI consumer sentiment index rose to 105.0 in June from 100.5 in May. The June reading is the strongest since February 2016 whereas the May result was the weakest since last December. So, there may be some element of compensating corrections in recent monthly movements. That said, the sense of some underlying improvement is suggested by the increase in the 3 month moving average which gives a sense of the recent trend in the sentiment survey. This measure moved up from 101.5 to 102.5, the best outturn since March 2016.

The increase in Irish consumer sentiment likely reflected domestic considerations as there were contrasting developments in similar indicators elsewhere. Some increased uncertainty of late about the US economy and the continuing sluggishness of wage growth in spite of rising employment may be weighing on consumers and contributing to a modest drop in sentiment in June.

UK consumer confidence saw a comparatively sharp decline that brought that index to its lowest level since last July as higher inflation has begun to squeeze living standards while the recent election result created doubts (and signalled serious divisions) about outlook for the British economy.

In marked contrast, Euro zone consumer confidence recorded its strongest reading since April 2001 as a range of better than expected indicators of economic activity may be encouraging consumers in the single currency zone to the view that a long overdue improvement in their prospects might be approaching.

The increase in Irish consumer sentiment in June was notable in that all five main elements of the survey posted monthly increases for the first time since January. This might suggest something of a mood shift but we would caution that the January gains were largely reversed in subsequent months. It could be that the June ‘bounce’ owes something to a reassessment of Irish economic and financial conditions as a new Taoiseach prepared to take office at the end of the survey period but we think variations in the scale of improvement in the different components of the survey hint that other specific factors played important roles.  Equally, the exceptional weather in late June came too late to have any impact on the survey results.

The most notable improvement in the June sentiment reading was seen in relation to the general outlook for the Irish economy over the coming twelve months. This element of the survey has tended to underperform through the past year reflecting increased risks to Irish economic prospects, particularly from Brexit. In recent months, a sequence of indicators has suggested the Irish economy is currently showing stronger momentum than was generally expected and notably greater health than might have been feared.  In turn, this sparked a series of upgrades to economic forecasts and assessments which continued through the June survey period.

Our sense is that the recent UK election result could be expected to have clearly contrasting effects on Irish and UK sentiment readings for June. In the UK, the election outcome may have made the policy path less clear by notably weakening the position of the Conservative government, thereby increasing uncertainty for UK consumers in a range of areas.

For Ireland, the recent UK election result was almost exclusively seen in terms of a possible reduction in the likelihood of a hard Brexit even if significant uncertainties persist. Given this outcome, the resilience of Irish economic indicators of late and the earlier underperformance of this element of the survey, it might not seem unreasonable to describe the June improvement in Irish sentiment as significantly reflecting a Brexit bounce. Indeed, last month’s survey reading showed 52% of consumers expect the Irish economy to strengthen in the year ahead , the first time a majority of consumers have expressed this view since June of last year (just before the UK referendum on EU membership).

The June sentiment reading also saw a notable rise in the jobs component of the survey. In part, this may have stemmed from the upgrade to the economic outlook described above. The survey period also saw a continuing positive news-flow of new job announcements and a largely positive assessment of the outcome of public sector pay talks.

June also saw a clear improvement in consumers’ assessments of their personal finances. After a May reading that saw equal numbers report better and worse household finances through the past year, last month’s survey found 28% reporting an improvement compared to 21% reporting a deterioration. These results are moving in a positive direction but they still suggest the majority of Irish households do not feel their financial circumstances have improved of late, an outcome that implies a continuing and important gap between most consumers’ perceptions and some recent warnings about an overheating Irish economy.

Significantly, consumers did not upgrade their expectations for their future spending power to anything like the same extent as other components of the survey. In fact, the share of consumers expecting their financial circumstances to improve in the next twelve months fell marginally to 28% (from 29% in May) and as such is only a little over half of those who expect the economy to improve over this period (52%), underscoring the sense of disconnect from the recovery. Increasing concerns through the survey period about housing market pressures and the relatively modest headline pay increase announced in the public sector pay proposals may have sustained a measure of caution in this regard. Encouragingly, there was some improvement in spending intentions in June. This likely corresponds to the start of the summer sales and a broader inclination to spend on holidays. As such, the general tone of the survey remains consistent with continuing healthy increases in consumer spending in the third quarter but it also underlines the strong sense of a still limited improvement in household finances.

PR Quotes -

Commenting on the results Daniel Foley, ESRI, said:

• "Compared to last month, there were significant improvements in perceptions in all aspects of the survey. In particular, there was a noticeable improvement in household’s view of the labour market and the general economic situation over the next 12 months. There was a 7 percentage point increase in the proportion of household’s expecting the economy to improve over the next 12 months compared to May. Labour market expectations also improved this month suggesting household’s expectations are starting to align with the consistent fall in the unemployment rate over the year."
• "The other aspect of the survey worth noting is the improvement in perceptions of personal finances compared to 12 months ago. This is indicative of households improving their balance sheets over the year and could reflect moderate gains in income coupled with paying down of debt as suggested by aggregate macroeconomic data releases over the year. The buying climate has also improved compared to May suggesting consumer’s uneasiness may be abating which appears to be consistent with the broader results in the survey."

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

• "The scale of the improvement in sentiment in June is slightly surprising. It may reflect relief that the threat of a hard Brexit is seen as reduced because of the outcome of the recent UK election as well as reassurance from the continued strength of recent Irish economic indicators. For the first time since the UK referendum vote, the majority of consumers now expect the Irish economy to improve further in the next twelve months."
• "The June sentiment reading is consistent with a solidly growing economy but only 28% of consumers feel that their own financial circumstances will improve in the coming year, a little over half the number that expect the economy to improve. With the majority of households not feeling they are experiencing any notable gains, this hints at a potentially troublesome disconnect between the perceptions of consumers and recent warnings about an overheating Irish economy."