Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland
Irish consumer sentiment improved in March, reversing much of the decline seen in February and continuing a see-saw pattern of monthly changes around a modestly positive trend in consumer confidence.
The monthly sentiment reading for March is notable for an improvement in expectations about household finances in the next twelve months and a similar upgrading of spending plans. This may owe something to post-Storm Emma planning for an improving climate both meteorologically and financially.
We felt the risk was that in the immediate wake of the poor weather in early March the mood of Irish consumers would have been a little more downbeat. It should be noted that the adverse weather meant the March reading was taken a little later than usual with just 10% of responses received by the 4th of the month.
The recovery in sentiment in March likely reflects a correction of particular weakness in expectations for household finances and spending plans in the February survey. However, it is also possible that Irish consumers may be beginning a fundamental re-assessment of their present circumstances and prospects. It will take several months before it becomes clear if this is the case.
It will be worth monitoring the expectations and spending elements of the sentiment survey in coming months for any indication the economic recovery is moving to a more mature stage in which that confidence among Irish consumers is increasing sufficiently to prompt them to consider stepping up their spending.
The KBC Bank/ESRI consumer sentiment survey increased to 108.1 in March from 105.2 in February with the 2.9 point increase reversing a little over half the of the previous month’s drop from the seventeen year high for the sentiment index reported in January (110.4). So, the broad trend in sentiment of late is one of uneven improvement rather than soaring confidence. However, the strength of the January and March data mean the three month moving average of the sentiment series, which provides a sense of the underlying trend is now at its strongest level since February 2001.
The improvement in Irish consumer sentiment in March mirrored an increase in the preliminary US reading that took the latter to its strongest level since 2004. Interestingly, the US survey showed a strong increase among lower income households ahead of expected increases in inflation and interest rates. So, the underlying picture in the US may not be as robust as the headline figure suggests. Euro area consumer confidence was unchanged in March having retreated modestly in February from January’s seventeen and a half year high.
These developments suggest that recovery from the global crisis is a common factor influencing sentiment amongst consumers worldwide. However, there are also sufficient differences to suggest the mood of consumers is also influenced by distinctly local factors.
Three of the five main elements of the KBC Bank/ESRI Irish consumer sentiment survey posted monthly increases in March. Views on the outlook for the Irish economy weakened slightly for a second successive month although it should be emphasised that positive expectations still exceed negatives by a wide margin (51% v 15%). The pull-back in March could owe something to the tone of assessments by the OECD and EU during the survey period which both emphasised downside risks to the outlook for the Irish economy.
If Irish consumers were a little more cautious about general economic prospects in March, they were slightly more positive about the outlook for the jobs market. This outcome likely reflected a range of positive developments during the survey period including a continuing sequence of new job announcements, a further decline in unemployment in official data and increasing commentary about labour shortages in specific areas.
Two of the three elements of the sentiment survey that relate to household finances showed monthly gains in March that partly reversed notable declines in February. The third element, which reflects consumers’ assessments of way their financial situations had evolved in the past year, recorded a monthly drop that didn’t fully unwind a significant improvement seen in the February survey.
This zig-zag pattern might suggest consumers are struggling to make sense of their financial circumstances at a time when earnings increases are relatively modest and low headline inflation masks substantial increases in specific areas of living costs such as housing. It also likely owes something to the continuing shadow of the crisis but the details of the March survey hint that consumers may be increasingly looking forward rather than back when assessing their personal financial positions.
The improvement in the March sentiment survey in relation to expectations for household finances and spending plans may simply reflect ‘noise’ as consumers attempt to make sense of a still uncertain if improving outlook.
It is also possible that these elements of the March survey hint that the recovery in the Irish economy is moving to a more mature stage in which consumers become a little more optimistic about their personal prospects and, as a result, become more willing to step up their spending. In turn, this would imply the Irish economic recovery could take on a notably more rounded complexion in the year ahead
It should be emphasised that signs that a ‘feel-good’ factor might be about to emerge are very tentative at this point and there were similar indications in these elements of the survey a year ago. The difference now is that the Irish economy appears to be on a stronger footing as evidenced by recent strong jobs data and the immediate risk posed by threats such as Brexit appears less daunting than twelve months ago. More definitive pointers in this regard would require that a strong trend in these elements of the survey would need to be sustained for at least a couple of quarters.
We would also note that up to now official data show little signs that any significant measure of ‘feel-good’ might be emerging among the population at large. As the graph below indicates, growth in the national accounts measure of Irish consumer spending has fallen well short of what has been a modest if uneven upward trend in consumer sentiment since the second half of 2016.
This divergence between sentiment and spending of late likely owes something to increased caution and financial pressures in the wake of the recent crisis that weigh on the willingness to spend. The measured gap may also partly reflect a range of technical issues in relation to the measurement of consumer spending in areas such as car sales and various services as well as some increased diversion of household spending into home purchase and improvements in recent years. The question the March survey raises rather than answers is whether a stronger trend in sentiment and spending might emerge through 2018.
Commenting on the results of the March consumer sentiment survey, Philip Economides, ESRI, said:
“The slight increase in sentiment in March continues the positive performance in 2018. Stronger attitudes towards employment prospects act as the main contributor towards the rise in consumer sentiment. It is worth noting this has occurred as the economy is poised to pass below the 6 per cent unemployment milestone for the first time since mid-2008.”
In addition, Austin Hughes, KBC Bank Ireland, noted:
“The improvement in sentiment in March is quite encouraging particularly in relation to the improvement in expectations for household finances and spending plans. This may be no more than a temporary blip but it could be hinting at the appearance of a ‘feel-good’ factor that could signal a step-up in consumer spending and a more rounded Irish economic recovery through 2018.
The pick-up in sentiment in March represents a continuation of a trend improvement in confidence as Irish consumers put more distance between themselves and the recent financial crisis. The shadow of the crisis is still a significant constraint on confidence but the March data suggest its impact may be diminishing and Irish consumers are increasingly looking forward rather than back.”
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