The mood of Irish consumers brightened during October. The KBC Ireland/ESRI Consumer Sentiment Index rose to 54.2 from 49.6 in the previous month to stand at its highest level since April 2008. We are surprised by the scale of the monthly gain and would not be surprised at some correction in the November data. The underlying trend as illustrated by the three monthly moving average rose a much smaller amount from 49.3 to 50.8. However, these data also suggest to a clear albeit more modest improvement in consumer sentiment in recent months.
The increase in Irish consumer sentiment in October has to be seen in the context of mixed results from similar data for other economies. There was a sharp rise in the GFK measure of
UK consumer confidence while consumer sentiment across the Euro zone posted only a marginal gain. In contrast, most of the main indicators of confidence for the
US showed substantial and unexpected declines last month as consumers fretted that a still tentative recovery was unlikely to materially boost their job or income prospects.
These divergent trends suggest that the gain in Irish consumer sentiment in October wasn’t the product of a global surge in confidence. That said, it should be recognised that Irish consumer sentiment deteriorated earlier and to a greater extent than elsewhere and has shown less of a rebound in recent months. So, there could be some element of catch-up in the Irish sentiment reading for October as consumers here grow more confident that the global economy has passed a turning point. In this context, comments during the survey period by US Federal Reserve Chairman Ben Bernanke that the
US recession was probably over and the release of upgraded global economic forecasts by the IMF could have had a significant impact on still fearful Irish consumers.
The relatively strong Irish sentiment reading for October is likely to have been driven by supportive domestic developments. The details of the survey show that four of the five main elements improved while the fifth held steady. This could suggest either a pervasive influence or the coincidence of a wide range of supportive factors.
Looking at the domestic news flow through the survey period, a great deal of coverage focused on the announcement of some of the main financial parameters around the operation of NAMA. In view of a significant amount of negative commentary on this topic, the jump in Irish consumer sentiment in October might seem surprising. It may be that consumers tended towards a pragmatic view that there is a need for urgent action even if there are reservations about some of the workings of NAMA. It should be emphasised that the consumer survey for October did not explicitly ask about NAMA. Instead, we simply point out that NAMA developments were a major event in a month in which Irish consumer sentiment rose sharply and we can only speculate as to why a positive link might be inferred. It should also be noted that these results seem consistent with those reported in the recent KBC Bank/ Chartered Accountants Ireland Business Sentiment Survey that found a strong majority of businesses felt the Government was right to adopt the NAMA approach.
Although NAMA could have influenced consumer sentiment in October, we think a number of other factors also played important roles in what was a widely based improvement in confidence. Perhaps surprisingly in a month in which nearly 700 proposed job cuts at Aer Lingus were the most striking of a large number of layoff announcements, the most positive aspect of the survey was the employment component. To put this in perspective, three out of four consumers expect unemployment to rise further next year while only one in ten see unemployment easing. Although this remains a gloomy assessment, it is markedly less awful than those made in the early months of this year. These results seem to chime with recent live register data that suggest the pace of job loss has eased somewhat of late. So, consumers may sense the worst new on jobs is behind us even if the employment outlook remains fairly poor.
Consumers also upgraded their view of the broader outlook for the Irish economy in the coming year in October. This likely owes a great deal to continuing signs of a turnaround in the international economy but it may also reflect the influence of upward revisions to a number of domestic economic forecasts including those of the Central Bank. Again, the October reading suggests that consumers are still braced for a very tough year for the Irish Economy in 2010, with negative views outnumbering positive by more than two to one. There is little sense that consumer are becoming particularly optimistic. Instead, they are just a little less pessimistic about Irish economic prospects.
Consumers assessment of their own personal finances also improved during October. A further sharp fall in consumer prices likely supported spending power while very dovish comments from the European Central Bank suggested that monthly mortgage repayments are unlikely to rise for some considerable time. The combination of an easing in ‘Macro’ fears and some improvement in personal finances might have been expected to support purchasing power but the October results emphasised that Irish consumers remain very cautious about their spending. Broadly based and significant gains in most other components of the survey failed to prompt an improvement in the buying climate which remained largely unchanged.
The October sentiment reading, remains at notably weak levels in terms of the thirteen year history of the survey. So, while consumers may feel marginally less gloomy they seem very unlikely to rush to the shops. That said the pick-up in sentiment should imply a slight improvement in consumer spending in the run-up Christmas.
