Munster Express Online

Irish consumer sentiment improved by a surprisingly large amount during the month of June.

The KBC Ireland/ESRI Consumer Sentiment Index jumped to 53.4 from 45.5 in May, while this month’s reading (53.4) is the highest since April 2008.

A more accurate picture of the underlying trend may be evident in the three month moving average of the series which rose to 48.5 in June compared to 45.5 in May. While this also signals a clear improvement, it is notably more modest than the one month change.

The scale of this month’s improvement in sentiment may appear extreme and could be at least partly reversed in the next month or two.

That said, the broad message coming from the survey in recent months seems to be that confidence among Irish consumers has bottomed out.

At current levels, the sentiment index is still telling us that the mood among Irish consumers is still fairly gloomy, as June’s reading should be seen against the historic series average of 93.9.

Arguably of greater significance is that the recent trend suggests Irish consumers haven’t entirely abandoned hope.

While they remain worried, they are also seeing tentative signs of a turnaround in the global economy that in time may translate into less troubling conditions in Ireland.

They may also be drawing some comfort from the possibility that the Irish budgetary position and the pace of job losses might be beginning to stabilise.

Faint signs of a bottoming out in a number of economic indicators in a range of countries and a more encouraging trend in stock markets appear to signal that the freefall in global economic activity may be at an end.

Most analysts and economists continue to be cautious and are reluctant to extrapolate the recent improvement too far.

Equally, it should be noted that in most countries, indicators of consumer confidence remain some considerable distance below their long term averages.

So, there is no sense that current sentiment readings imply any ‘irrational exuberance’. Instead, they suggest consumers feel their worst fears may not be realised.

The rise in Irish consumer sentiment in June was broadly based. Four out of the five components of the index posted a monthly gain. The most dramatic increases were seen in consumer’s assessment of the general economic outlook and job prospects.

Again, it should be emphasised that the June reading still reflects a fairly downbeat view of what the next 12 months may hold for the Irish economy.

Negative assessments of the broad economic outlook still outweigh positive views by more than two to one and four out of five consumers expect unemployment will rise further against just one in 15 who think the worst may be over on the jobs front.

However, even these extremely cautious readings are notably less gloomy than has been seen at any time since last Spring.

A sense that the world economy may have reached and could be starting to move away from its lowest ebb is likely to have been a major influence on such views.

However, we noted last month that a domestic ‘feel bad’ factor was limiting Irish consumers’ capacity to share in the relief felt by their counterparts in other countries.

So, the less pessimistic Irish reading in June could also reflect slightly better domestic news in the form of a stabilisation in tax revenues and a more modest pace of increase in numbers joining the live register.

Irish consumers realise that the current situation, both in terms of the public finances and unemployment, remains very poor but, after the experience of the past eight or nine months, it may be significant that both appear to have stopped getting worse.

It is also notable that Irish consumers upgraded their views on their own household finances in June.

This is because the timing of the survey, taken in the first two weeks of June, means the survey should have fully reflected the painful impact of April’s supplementary budget on pay packets.

Consumers also appear to have noticed the helpful effect of the May ECB interest rate cut on mortgage repayments and broader signs of sharp price discounting by retailers.

The one negative element of the survey this month was that consumers felt it was a poorer time to make major purchases.

After a substantial gain in May, it was not entirely surprising that consumers downgraded their opinion of the buying climate in June.

To summarise, it would be wrong to dwell too long on the size of the improvement in the consumer sentiment index in June. The likelihood is that some of this month’s exceptional gain could be reversed in the next month or two.

It is also important to note that the current level of the KBC Ireland/ESRI sentiment index implies that consumers remain extremely cautious.

Significant as these caveats may be, it must be recognised that the jump in consumer sentiment in June builds on a more favourable trend that has been evident in recent months.

So, it would appear that confidence has bottomed out and is showing tentative signs of an improvement. It is particularly significant that this occurred at a time when the impact of increased levies announced in April’s supplementary budget were reducing pay packets.

It is also notable that the sentiment index strengthened at a time when results of by-elections, Local elections and European elections all pointed towards a considerable level of political dissatisfaction.

Against this backdrop, it is slightly surprising and very encouraging from an economic perspective that Irish consumers could discern positive economic developments of late.

It may be that reasonable consumers are willing to accept a measure of pain if they detect even faint signs of progress.

 

Austin Hughes is the Chief Economist of KBC Ireland.