Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland
Irish consumer sentiment edged higher in May as spending plans improved in spite of increased uncertainty about the general economic outlook and prospects for household finances. The KBC Bank Ireland/ESRI consumer sentiment index increased to 106.7 in May from 104 in April, reversing about two thirds of the drop seen between March and April.
With more positive than negative responses to all of the main elements of the survey, the May reading suggests the mood of Irish consumers remains one of guarded optimism. However as the May index is lower than that seen in either January or March, the survey continues to hint at a recovery that from the perspective of the average consumer is patchy rather than progressive.
The rise in Irish consumer sentiment in May contrasted with modest declines in similar indicators for the US and Euro area but last month also saw a small improvement, albeit to a still markedly negative reading, in UK consumer confidence.
Although concerns about global trade tensions and rising energy costs likely sparked similar concerns in all these regions, to borrow from Tolstoy, consumers in different areas are each unhappy in their own way.
US consumers anticipated smaller income gains than a month ago while Euro area consumers were more focussed on ‘macro’ concerns that seemed to reflect a sequence of unexpectedly weak Euro area indicators of late. In the UK, consumers were a little more optimistic about the economy but have become more cautious about their future spending, perhaps reflecting a softer trend in UK house prices of late.
The strong sense of an Irish consumer being buffeted by cross-currents rather than riding a tidal wave of economic and financial improvement is suggested by mixed readings in the components of the sentiment index last month. The May survey results saw three of the five key elements of the sentiment index registering stronger readings than in April whereas the remaining two were slightly weaker than a month earlier (although as noted above, positive responses significantly outnumbered negatives in all instances).
The two elements of the May sentiment survey that were weaker than their April counterparts were consumers’ expectations for the Irish economy and their household finances over the next twelve months. We would caution that the monthly changes were modest and, in both instances, reflected increases in negative responses that outweighed smaller increases in positive responses. So, there seems to be an increasing divergence in consumers’ expectations for the year ahead.
After a notable drop in April which we attributed to layoff announcements in a couple of high profile Irish companies, there was only a marginal improvement in the employment element of the survey in May. There was a similarly modest and partial retracement of April weakness in consumers’ views of their household finances over the past twelve months.
The strongest element of the May survey (relative to April) was in relation to household spending plans. Again a key element was a correction of particular weakness in this area of the survey in April. As we noted previously, volatility in consumers buying intentions is partly a reflection of a structural change in which spending is more heavily concentrated around specific occasions, such as Easter or summer holidays, or around periods of heavy price discounting.
More generally, we would interpret this volatility in spending plans as symptomatic of an Irish consumer who is either cash constrained or notably cautious (or both). There is certainly no sign in this or other elements of the sentiment survey of any ‘exuberance’ in the behaviour of Irish consumers that might be symptomatic of an overheating economy at present.
The pull-back in expectations both for the Irish economy as a whole as well as consumers’ own household finances also sits uneasily with a ‘bubbling ‘ economy at present but this reading is entirely consistent with the evidence emerging from other indicators in the past couple of weeks.
The measured tone of Irish consumer confidence at present mirrors the picture of the economy suggested by relatively modest growth in retail sales which (excluding cars) were up just 1.8% y/y in value terms in April and average weekly earnings which increased 2.4%y/y in Q1 but was just 1.8% in the more cyclically sensitive private sector and is, consequently, somewhat at odds with the OECD’s recent characterisation of an Irish economy experiencing strong and rising ‘wage pressures’.
There are sectors of the Irish economy experiencing strong growth at present. In some instances, the current pace of increase could be problematic if it persists for another couple of years or if it were intensified by fiscal or credit largesse. However, there is little indication that either of these levers is currently overextended and the sentiment survey suggests consumers’ expectations are relatively modest rather than excessively demanding (just 28% see their personal financial circumstances improving in the next twelve months).
Arriving at the right setting for each element of the mix of domestic policy levers will be much harder if the current position of the Irish economy is unclear or misjudged. In this context, material risks of overheating in some areas have to be measured against contrasting challenges in others. The diagram below shows that the real spending power of the average Irish consumer has improved proved of late but still falls short of levels seen in 2007. In that respect, it might appear closer to the experience of Italy than that of Germany. These results and the details of the sentiment survey argue against undue policy shifts in either direction.
Commenting on the results Philip Economides, ESRI, said:
“The rise in sentiment in May is driven by a greater positivity towards how consumers view their own personal finances as well as an increased willingness to make large household purchases. This is unsurprising given the buoyancy of the domestic economy. However, consumers are less optimistic in regard to the future economic outlook. Risk factors such as Brexit and international developments may be contributing to an air of caution.”
In addition, Austin Hughes, KBC Bank Ireland, noted:
“The May sentiment survey suggests confidence on the part of Irish consumers is strongly tempered by caution. Expectations for the Irish economy and household finances both dipped slightly last month as risks to the global outlook continue to emerge and many consumers continue to face financial strains.
The details of the sentiment survey show no signs that expectations are building in a way that might suggest overheating risks are becoming embedded in the Irish economy. Instead, the tone of the latest consumer confidence reading is entirely consistent with recent indicators showing modest increases in earning and spending that point towards an uneven recovery across households and businesses.”
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