Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland
Irish consumer sentiment was effectively unchanged in December. At current levels, the survey implies a reasonably positive assessment of the Irish economy but recent readings also suggest that most consumers see only limited progress in their personal financial situations of late.
The KBC Bank Ireland/ESRI consumer sentiment index saw a slight decline to 103.2 from 103.6 in November. However, this slippage is far too small to indicate any material change in the mood of Irish consumers in the final days of 2017. So, the December reading is best seen as unchanged from the previous month.
A solid improvement compared with the December 2016 sentiment reading of 96.2 implies that Irish consumers have become more confident in the past twelve months but this largely reflects a correction of fears that emerged following the UK Brexit vote a year and a half ago. The fact that last month’s figure merely matched the average level of the sentiment index in 2017(also 103.2) emphasises that we are not seeing a progressive and self-reinforcing build-up in ‘animal spirits’ among Irish consumers.
In many ways, the sentiment survey highlights notable contradictions in the circumstances of the typical Irish consumer at the end of 2017. While there is relief at widespread evidence of a strengthening Irish economy, it seems that many consumers still feel quite removed from the pick-up in personal finances that such buoyant economic conditions would traditionally deliver.
There is little question that the Irish economy is improving but the recovery in household finances remains modest and uneven particularly when judged against the scale of losses suffered through the downturn. This makes it notably harder for consumers to reconcile talk of a return to boom conditions with many households’ experience of continuing pressures on their living standards.
It is important to distinguish between the trends driving the perception of boom conditions in the economy as a whole and the altogether more muted recovery in the circumstances of the ‘average’ Irish consumer. Irish GDP growth is now about 50% higher than its end 2007 peak but this scale of turnaround is not at all reflective of the economic conditions faced by the majority of businesses and households.
Another important consideration is Ireland’s growing population. Aggregate consumer spending is some 3.8% higher than its early 2008 peak but the population has grown strongly in the interim. So, the current spending of the typical Irish consumer is still about 4.8% below the level they experienced at the peak of the previous ‘Celtic tiger’ era. Similarly, while aggregate household disposable income is now higher than ever before, when adjusted for population changes, the income of the average household is still around 5% below the previous peak.
It should be emphasised that the consumer sentiment survey is signalling a clear improvement in the circumstances of the average Irish consumer in recent years but it also highlights continuing constraints on the recovery. The absence of a broadly based ‘feel-good’ factor in these consumer confidence data reflects both the limited nature of the gains for most households and, for many, the lasting nature of problems encountered since the downturn.
The sentiment survey suggests that few Irish consumers are likely to subscribe to the view that they have never had it so good. Instead, a sustained disconnect between ‘macro’ and ‘micro’ conditions could fuel a sense of exclusion and/or unrealistic expectations with damaging economic and social consequences.
It should be noted that Irish consumers are far from unique in facing significant difficulties and uncertainties. Although the global economic outlook has become much healthier of late, this hasn’t automatically translated into a corresponding improvement in household finances. As a result, there has been something of a divergence between conventional measures of economic activity and consumer confidence indicators across a number of countries of late.
While US consumer sentiment has been relatively strong through 2017, the December reading was lower than both the previous month and that of a year earlier. The compilers noted that most of the monthly decline was seen among lower income consumers, an outcome that may reflect concerns about the distributional impact of recent US tax changes as well as broader disappointment about income trends for most US households.
In the UK, economic trends have not been as weak as feared but consumer confidence slid to its lowest reading in four years, as higher inflation and increased uncertainty about the precise nature of Brexit weighed on consumers’ assessment of their household finances and the broader economic outlook.
In broad terms, the December 2017 sentiment survey suggests Irish consumers are cautiously optimistic, with more positive than negative responses to each of the five questions that make up the sentiment index. Three of these elements showed marginal improvement compared to their November readings, one was unchanged and one showed a decline that while reasonably modest was sufficient to lead to a fractional weakening of the overall sentiment index in December.
The slight drop in Irish consumer sentiment in December was prompted by a somewhat weaker assessment of the outlook for household finances. Unusually, slightly fewer consumers see their own financial circumstances improving in the next twelve months (26%) than feel their circumstances improved in the past twelve months (27%).
We are not aware of any major developments through the survey period that would have materially altered consumers’ views on their financial futures and, it should be emphasised that the movement in this part of the survey was not dramatic. Our sense is that this weakening may reflect some element of concern as Christmas-related spending picked up (including the late November ‘black Friday‘ spree) while income growth remained constrained. Such concerns may have been heightened by increased expectations as to what level of spending a booming economy might warrant.
It might also be speculated that the announcement during the survey period of government reforms that would increase the compulsory retirement age for many public servants could also have focussed attention on the need for a larger pension pot that follows from increased longevity. Again, where the majority of households do not envisage a clear improvement in living standards in the coming year, the capacity to provide for an increased ‘nest egg’ may appear more onerous.
The fact that households marginally upgraded their assessment of how their financial circumstances had evolved in the past twelve months and also tweaked their spending plans higher suggests the December survey is not pointing to any fundamental weakening in the financial situations of Irish consumers. Instead, it again highlights the tensions between limited income gains and the expectations that follow from seemingly buoyant economic conditions after a very painful downturn.
We expect to see some improvement in the January consumer sentiment index in line with an established seasonal trend. The combination of bargain–hunting in post-Christmas sales and new year optimism, underpinned by a healthy Irish economy should ensure a solid start to sentiment in 2018. However, as the December survey reading suggests, the average Irish consumer is being buffeted by a range of forces that mean they are not seeing a progressive and palpable improvement in their fortunes.
Commenting on the results Philip Economides, ESRI, said:
“The Consumer Sentiment Index for December marks the end of a year characterised by a recovery in attitudes towards household’s current economic circumstances as well as expectations of future growth going into 2018. While uncertainties are potentially making households wary about their own personal financial circumstances for the coming 12 months, the broader economic recovery is certainly filtering through into a more positive consumer sentiment relative to 12 months ago.”
In addition, Austin Hughes, KBC Bank Ireland, noted:
“The December sentiment survey suggests that the average Irish consumer is seeing a good rather than a great economic recovery. The details highlight significant optimism about the outlook for activity and employment in the Irish economy but strike a more cautious note in relation to expectations for personal finances. For most consumers, reports of a return to boom-time conditions seem very remote from their own experience.
A slight downgrading of the outlook for household finances in the December survey likely reflects increased spending demands ahead of Christmas. It might also owe something to concerns about the need for larger longer term financial nest-eggs. We would expect some uptick in sentiment in January on bargain hunting in post-Christmas sales and a measure of New Year optimism but the December results suggest that the typical Irish consumer is being buffeted by an array of influences that mean they are not seeing a ‘normal’ improvement in their circumstances.”
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