Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland
Irish consumer sentiment weakened for the third month in a row in October as worries about the global economy and the risks posed by a hard Brexit in particular prompted increased nervousness about the economic outlook and a notably more cautious view of household spending.
It remains the case that the current reading of the sentiment survey still suggests Irish consumers are broadly positive in their views in relation to their personal finances and the broader Irish economy but the level of confidence expressed in both areas has slipped markedly of late.
The fall in the October reading was relatively modest and, consequently, doesn’t suggest panic has set in among Irish consumers but the cumulative drop in sentiment since July is the largest three month decline since the autumn of 2010. This scale of drop suggests a major mood change on the part of Irish consumers of late. From circumstances in which they were sensing a clear if uneven recovery, it seems that Irish consumers are now entirely focussed on the risk of a sharp and painful reversal.
To borrow from a warning issued at the recent IMF meeting that itself paraphrased from ‘Game Of Thrones’, it seems that Irish consumers are now of the view that ‘winter is coming’ -and adjusting sentiment and spending plans accordingly.
The nature of the risks the Irish economy now faces means that it isn’t at all clear whether consumer thinking has adjusted too much or too little but the rapidly reducing Brexit timetable means consumer sentiment and spending could see further significant changes in one or other direction in the next couple of months.
The KBC Bank/ESRI consumer sentiment index fell to 93.5 in October from 96.4 in September which is mainly due to big monthly declines in August and September and means the sentiment index is now at its lowest level since December 2014.
The degree of weakening in consumer sentiment in Ireland of late is not mirrored in other comparable economies. In the US, sentiment dipped slightly in October but year to date has been higher than in any year since 2000.
In the Euro area, consumer confidence improved marginally in October and, as diagram 1 below illustrates, has been notably more resilient than the Irish consumer sentiment index in recent months in spite of political difficulties in Germany and major tensions about budgetary and broader economic policy settings in Italy.
In recent months, Irish consumer sentiment has even seen a notably sharper adjustment than its UK counterpart. The latest UK confidence reading for showed a slight decline (to -10 from -9) but this produced a three month low in UK sentiment whereas the Irish index is at a 46 month low. In part, this recent divergence may be because UK consumer confidence had taken a notably larger hit around the time of the Brexit referendum.
However, this may also reflect a notably greater sensitivity on the part of Irish consumers to the economic difference between a ‘soft’ Brexit not being fully felt until the end of a transition period in 2020 and a disorderly ‘hard’ Brexit raining large but unpredictable problems on the Irish economy in just five months’ time.
In this context, it might be argued that UK consumers may be distracted by political machinations around the withdrawal process of late and, as a result, are not as focussed on the near term risks posed by a ‘crash out’ hard Brexit as Irish consumers are at present.
Four of the five key elements of the Irish consumer sentiment survey declined in October compared to September. The exception was in relation to the outlook for household finances which improved marginally but remained well below levels seen through most of 2017 and 2018. The pick-up in this area of the survey may in part be a correction following large declines in recent months but it could also owe something to Budget 2019 measures that while modest in themselves did imply the prospect of some marginal improvement in spending power for many households.
But consumers more downbeat about current state of household finances and more cautious about spending
In contrast, consumers’ assessments as to how their household finances had developed in the past twelve months saw a small but notable decline. Some 21% of consumers feel their financial situation improved in the past year but 25% think theirs deteriorated. These responses are the most negative for this element of the survey since October 2016.
At the margin, some consumers’ views on historic trends in their spending power may have been coloured by commentary comparing current tax burdens to those of ten years ago. However, as this element of the survey was also negative in September ( albeit slightly less so than in October), it seems more likely that modest income gains and high-profile cost increases in areas such as housing were more influential. In this context, the September inflation reading, while reasonably contained, at +1.2% (on a harmonised basis) was the highest in nearly five years. Moreover, the rise reflected large and visible increases in fuel costs.
The largest monthly drop in the October survey was in relation to household buying plans. This element of the survey tends to be volatile and the weak October reading may in part reflect a deferral of purchasing until the now established ‘black Friday’ bargains appear in late November.
However, we reckon a more important driver of a poorer buying climate is the sharply increased risk of a Brexit related deterioration in Irish economic conditions and, by extension, notable risks of jobs and income losses for many Irish consumers. Increased uncertainty is leading to an understandable and appropriate scaling-back of spending plans. Again, it needs to be emphasised that the October reading points towards a slowdown rather than a stop in consumer spending. However, we would take the view that the sentiment data are pointing to a notably weaker trajectory than might be inferred from the surprisingly strong retail sales figures for September (which saw the strongest monthly rise for the ex-cars figure in a series which stretches back to 2015).
Not surprisingly, both ‘macro’ elements of the sentiment survey registered clear declines in October. However, while Brexit and a range of other risks cast a dark shadow over the outlook, most incoming data remain encouragingly positive and suggest the Irish economy is still moving forward with significant momentum. As a result, the declines in these areas were clear but contained.
It may be worthwhile considering whether the recent drop in consumer sentiment is signalling the possibility of a marked weakening in Irish economic conditions. Thus far, the impact of Brexit concerns on the Irish economy has been reasonably contained at the ‘macro’ level. Indeed, the impact of weaker sterling directly on imported goods and indirectly on retail pricing more generally has boosted purchasing power and supported consumer spending. However, if consumer sentiment and spending turns notably more cautious, this could be an additional channel through which Brexit threatens the Irish economy.
As diagram 2 indicates, consumer sentiment has tended to run ahead of changes in employment in downturns but has also been slower to respond to upswings. It over-estimated the risks of a dot-com fall-out on Irish based multinationals and consequently on the broader Irish economy in the early 2000’s but correctly anticipated the fall-out from the global financial crisis a few years later.
Benchmarked against historic downswings, the current correction in Irish consumer sentiment appears to be relatively modest. There is little to suggest anything approaching panic has taken hold of Irish consumers. While recent sentiment readings may hint at some slowdown in the pace of increase in household spending, they are not signalling any marked retrenchment. Of course, in the event of a ‘no deal’ Brexit, the likelihood is that sentiment and spending would move quickly onto a notably less favourable trajectory.
Commenting on the results Philip Economides, ESRI, said:
While overall sentiment has declined in October, consumers are more bullish in relation to the outlook for their own personal circumstances. This may be linked to the modest gains for personal incomes as a result of Budget 2018. These factors overall have been outweighed by growing concerns regarding the general economy. Given that the negotiating space of the British government continues to narrow and progress towards a satisfactory Brexit-proposal remain elusive, consumer sentiment is likely to remain subdued until such uncertainties pass.
In addition, Austin Hughes, KBC Bank Ireland, noted:
The monthly drop in consumer sentiment in October is relatively modest and suggests panic hasn’t taken hold. However, the continuing decline in October has led to the sharpest three month fall since 2010 which clearly indicates that Irish consumers have gotten a good deal gloomier of late.
The much-increased threat of a ‘no deal Brexit’ among a range of global uncertainties, coupled with rising costs for housing and fuel and, in many instances, household finances still strained from the crisis have all contributed to circumstances where, to borrow a phrase, there is a strong sense from the sentiment survey that winter is coming.
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