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| Sharp Rise In Irish Consumer Sentiment In March |
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By
Austin Hughes – Chief Economist, KBC Bank Ireland
Apr 19, 2011 |
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- Surprise jump in consumer confidence may reflect hopes for a ‘fresh start’ under new Government but doesn’t suggest Irish consumers ‘irrationally exuberant’.
- March reading still consistent with relatively weak outlook for consumer spending.
- April data should reveal whether confidence may be beginning to turn.
Irish consumer sentiment rose sharply and unexpectedly in March. The KBC Bank/ESRI consumer sentiment index increased to 59.5 from 50.3 in February. This is the strongest reading since last August. In addition, the change between February and March was the third largest monthly rise in the fifteen year history of the survey. The March result means that most of the sharp deterioration in the sentiment index that occurred in the latter stages of 2010 has been reversed.
At current levels, Ireland’s consumer sentiment index still points towards relatively weak household spending as Diagram 1 below indicates. The March results also suggest Irish consumers remain fairly gloomy about the outlook for the economy and their own household finances. Negative responses outweigh positive for each of the five main components of the survey, in most instances by a considerable margin. The March figure at 59.5 remains well below the series’ long term average of 89.3. So, the March outturn doesn’t imply any irrational exuberance has taken hold of Irish consumers. However, it could hint at least tentatively that consumers may feel the worst could be over for the Irish economy.
The improvement in Irish consumer sentiment in March appears all the more surprising in the light of broadly based weakness in comparable indicators for a range of other countries last month. US consumer sentiment, as measured by the University of Michigan Index, fell to its weakest level since late 2009. Consumer sentiment in the Euro area also fell, albeit marginally, while UK consumer confidence remained extremely weak. In the case of most of these countries, consumers are responding to heightened uncertainty and fears of renewed economic weakness. In the case of Ireland, greater political certainty and, perhaps, a honeymoon period for the new Government could have contributed to the improvement in sentiment. In addition, in contrast to circumstances elsewhere, there are few concerns here that a fledgling recovery might be vulnerable to a setback largely because expectations in relation to the economic outlook have remained consistently downbeat.
The March survey results could be interpreted as hinting at a measure of ‘recession fatigue’ among weary Irish consumers who have come to expect a steady torrent of bad news and may feel they have prepared themselves for a continuing storm to the best of their abilities. As Diagram 1 above indicates, the drop in Irish consumer sentiment through the second half of 2010 was a good deal more pronounced than that in household spending. So, the March results could be consistent with an assessment that the ‘new normal’ might not be quite as awful as had been feared.
We should soon know if the March sentiment reading is hinting at a lasting change in consumer attitudes or is simply a temporary ‘blip’ that gives way to renewed worries about the future. The April survey results of the recent Irish bank stress tests and the April ECB rate increase. So, the sentiment reading for April could be instructive. There is little question that the sharp increase in estimates of the costs of Ireland’s banking crisis that emerged late last year played a significant role in the marked deterioration in consumer sentiment through that period. For this reason, the judgement of consumers on the most recent estimates of the costs of banking problems to Irish taxpayers bears watching. Unfortunately, it may prove difficult to disentangle this influence completely from consumers’ reaction to last week’s ECB interest rate rise.
Diagram 2 above illustrates that there has been a long lasting and significantly negative relationship between changes in ECB interest rates and Irish consumer sentiment. This reflects the importance of mortgage debt repayments in the financial positions of many Irish households. As Diagram 2 shows, the two previous ECB hiking cycles in 1999/2000 and 2006/2008 coincided with markedly weaker trends in consumer sentiment. Of course, in both instances, a broader and notably more pessimistic re-appraisal of Irish economic prospects occurred during the period of ECB rate hikes. However, it seems reasonably clear that rate increases have a significant negative impact on Irish consumer confidence.
How marked the immediate impact of higher rates might be remains to be seen. It should be noted that three quarters of last month’s interviews were conducted after Thursday 3rd March, the date on which the ECB signalled its intention to raise interest rates in April. So, the March survey results should reflect some significant degree of expectation that borrowing costs were about to head higher. This makes last month’s outturn even more surprising but as Diagram 2 suggests, a marked negative impact on sentiment may not become evident until a sequence of rate hikes is well underway. Precedent suggests that if we see a number of increases in ECB interest rates through the coming year, this might be expected to weigh progressively on sentiment and household spending.
Turning to the details of the survey, the increase in consumer sentiment in March was notable in that all five of the main components of the sentiment index improved. This rarely happens (just ten times in the survey’s fifteen year history) and the March increase was the first time this has occurred since January 2010. There were significant increases in four components and a marginal gain in the spending climate. The weak rise in buying intentions would seem to suggest that any emerging improvement in sentiment is unlikely to spark a marked pick-up in consumer spending. Even if Irish consumers become somewhat less gloomy, they face major constraints on their spending power in the form of tax increases and cuts in benefits as well as through the recent acceleration in inflation and the looming jump in mortgage borrowing costs. A turnaround in consumer confidence may be a necessary precondition for a healthier trend in spending in the Irish economy. However, given the pressures on spending power at present, improved sentiment by itself may be insufficient to generate much of a pick-up in consumer outlays.
KBC Ireland/ESRI Consumer Sentiment Index
KBC Bank Ireland plc,
Sandwith Street,
Dublin 2.
Tel: + 353 1 664 6892
Fax: + 353 1 664 6898
www.kbc.ie
Registered in the Republic of Ireland. Number 40537
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