Irish consumer sentiment showed a surprisingly strong improvement in January. The KBC Bank/ESRI Consumer Sentiment Index rose to 64.6 from 53.3 in December, boosting the Index to it’s highest level in two years. The 11.3 point increase was also the strongest monthly change since a similar rise in December 2004. While this increase looks almost suspiciously large and there may be some pullback in February, the January data suggest a clear brightening in the mood among Irish consumers. The three month moving average, which gives a better indication of the underlying trend, also rose appreciably to 57.2 from 53.7.
We would caution against concentrating too much on the scale of the increase in Irish consumer sentiment in January. The details of the survey suggest the improvement is unlikely to be an aberration. All five components of the Index rose in January. This was the first time this occurred since January 2006 and it has only been observed nine times in 167 months in the history of the series. There is little question that the improvement in sentiment was substantially boosted by the strongest gain in the buying climate on record. Evidently, consumers were encouraged by what seems to have been very aggressive price discounting in the Winter sales. These results may also reflect a somewhat broader sense of relief at indications of a bottoming out in economic activity and, perhaps, the absence of further income tax increases in Budget 2010.
We would caution against inferring that the improvement in the buying climate suggests pent-up demand is about to be released in markedly stronger consumer spending in early 2010. Uncertainty about the economic outlook remains entrenched while spending power remains under pressure from faltering incomes and employment. In addition, poor weather is likely to have curtailed spending in the early new year. That said, signs of a slightly stronger trend in car sales in January are consistent with the survey findings. So, these results hint at a slightly less negative trend in consumer spending in early 2010 than might have been feared. We would expect a possibly significant correction in this element of the survey in February data as Christmas sales end and Christmas credit card bills arrive. This could be large enough to reduce the overall index. However, any pullback may not be sufficient to reverse what seems to be an improvement in the underlying trend in Irish consumer sentiment of late.
It is important to emphasise that the improvement in consumer sentiment in January was broadly based. The rise in the buying climate only contributed about one third of the overall gain in the Sentiment Index. The other four elements of the survey all posted significant gains. Indeed, in percentage terms, the improvement in consumers’ assessment of the outlook for the Irish economy was even greater than in the buying climate in January. This presumably reflects the view that the worst is over for the global economy and, possibly, for Ireland. Arguably, it might also hint that consumers take the view that Budget 2010 represents the right medicine for the Irish economy. The January results still imply a relatively downbeat view of Irish economic prospects. Some 43% of respondents expect the economy to deteriorate further in the coming year while only 31% expect an improvement. Some perspective on the extent to which an extremely gloomy outlook had become entrenched is indicated by the fact that last month’s reading was the strongest for this element of the survey since September 2007. So, the January 2010 reading is probably best regarded as a rational easing in pessimism rather than the emergence of irrational exuberance.
A less negative view of Irish economic prospects was accompanied by a slightly less negative assessment of the outlook for employment. Again, the January reading implies consumers still take an extremely cautious view of the jobs market. Some 70% of respondents see unemployment rising further in the year ahead while only 11% see a decline. So, there is no suggestion of any ill-founded optimism in these data. Instead, it appears consumers take the view that job losses will continue but they don’t expect losses to be on the scale seen in early 2009. As a result, they are marginally less gloomy rather than particularly positive but any turnaround in the broader Irish economy as well as sentiment is likely to take the form of a series of relatively small steps away from entrenched gloom rather than a giant optimistic leap into notably stronger conditions.
While the ‘macro’ elements of the survey posted substantial gains in January, the increases in those elements related to household finances were more modest. Perhaps surprisingly, the improvement in the forward looking aspect of the household finances was a good deal larger than in consumers’ assessment of how their purchasing power developed in the past twelve months. Perceptions of household purchasing power deteriorated through most of 2009 even though a significant reduction in consumer prices and a particularly sharp drop in borrowing costs should have had a major impact on the spending power of most of those who retained their jobs. However, a more gloomy subjective assessment of the development in household finances probably suggests the judgement that there has been a permanent hit to living standards in the past year or two. Reflecting these concerns, as few as 4 per cent of those surveyed in January 2010 felt their household finances had improved in the past year. Again, some measure of the degree of gloom that prevailed through 2009 is indicated by the fact that fewer than 2 per cent thought that was the case in December.
Encouragingly, consumers were less negative about the outlook for their household finances in the coming year than they were about their recent experience. Responses to the forward looking question were the strongest since March 2008. Again, it remains the case that far more consumers expect their incomes to fall rather than rise in the coming year. At the margin, the improvement in this element of the survey in January may reflect relief at the absence of significant income tax increases in Budget 2010. As a result, it might be prudent to wait for a few more months data – and particularly the impact of lower January public sector pay packets and welfare payments, before arriving at definitive conclusions. More tentatively, the January data give little sense of a negative ‘shock’ to household budgets in the wake of December Budget. So, it could be that cutbacks were no greater than had been feared. The January data might also be consistent with a longer term view that restoring order to Ireland’s Public Finances provides the best prospect of protecting living standards in the years to come.
The improvement in Irish consumer sentiment in January coincided with gains, albeit on a far more modest scale, in consumer confidence measures in both the US and UK. In contrast, similar indicators for a range of continental European countries were stable or somewhat weaker. This might suggest consumers in ‘Anglo Saxon’ style economies are responding to signs that what has been a sharp and very painful downturn in activity and employment may have passed it’s low point. On the other hand, consumers in Continental Europe may fear that the worst news in terms of household incomes and employment may still lie ahead as the adjustment phase in these economies may be more protracted. The Irish consumer sentiment data seem to share characteristics of their US and UK counterparts that hopefully reflect tentative signs of a turnaround rather than ‘recession fatigue’.
To summarise, the January consumer sentiment reading suggests a continuing improvement in the mood of Irish households. The scale of the increase in the Index last month seems exaggerated and the likelihood is that February will see some retracement. However, it would seem a mistake to focus on the size of the monthly change in January. Given how far and fast sentiment weakened in recent years, such ‘outliers’ might well be expected as the mood of consumers changes. We think the significant message from the January survey is that it points towards a further easing in the terror that gripped Irish consumers in relation to the outlook for the economy in general and jobs in particular. Consumers are still cautious and with good reason but they began 2010 on a notably more positive note. Although we would allow another month or two before arriving at a definitive judgement, the January results might also suggest that consumers feel Budget 2010 has improved the outlook for the Irish economy without imposing an excessive burden on household spending power.
KBC Ireland/ESRI Consumer Sentiment Index – January Data
by Austin Hughes – Chief Economist, KBC Bank Ireland - 01 – 6646889
KBC Bank Ireland plc Sandwith Street, Dublin 2. Tel: + 353 1 664 6892 Fax: + 353 1 664 6898
A member of KBC Group NV Registered in the Republic of Ireland. Number 40537
The above information is believed to be reliable, but is subject to change without prior notice
