The overall IIB Bank/ESRI Irish Consumer Sentiment Index rose in August. The Consumer Sentiment Index was 43.4 in August 2008, compared with 39.6 in July.
Commenting on the results David Duffy, ESRI, said:
“Consumer sentiment improved in August. However, the August reading of 43.4 compares with a reading of 72.0 in August 2007 and is well below the value of 67.0 at the start of this year”
“Much of the improvement can be attributed to a more positive perception by consumers of the current buying climate. This may well reflect the impact of the summer sales.”
“Although sentiment has improved the underlying figures suggest that any recovery in confidence remains tentative.”
In addition, Austin Hughes, IIB Bank, noted:
“It is too early to suggest sentiment is stabilising but the fact that Irish consumers responded favourably to price discounting in the Summer sales, falling oil prices and less threatening news on interest rates means they haven’t entirely given up the ghost. The key question is whether the news over the next few months is going to get worse or better. This raises some important questions for the government as a policy response is considered.”
“While the improvement in consumer spending in August is very welcome it should be emphasised that current survey readings are still suggesting a fairly gloomy mood that is consistent with very subdued levels of spending.”
Note:- Since May 2008 the IIB Bank /ESRI Irish consumer sentiment survey was prepared using a slightly different methodology. While this may have a minor impact on the precise numerical estimates of various survey components, it should not have any significant effect on the broad trend reported.
Austin Hughes further commented:
Irish consumer sentiment edged higher in August as tumbling oil prices and fading fears of further interest rate increases slightly eased concerns about household spending power. The IIB/ESRI Consumer Sentiment Index increased to 43.4 from 39.6 in July ending a six month sequence of declining confidence. It should be emphasised that the mood of Irish consumers still remains very gloomy but this month’s results suggest that although confidence is fragile, consumers are at least capable of taking comfort in a number of slightly encouraging developments.
While the improvement in sentiment in August was relatively modest it was broadly based with 4 of the 5 components of the IIB/ESRI Index posting monthly gains The strongest element of the survey was the buying climate as consumers responded to reportedly large price discounts in summer sales. While this component is volatile, this month’s increase suggests that Irish consumers still have the wherewithal to spend if presented with sufficiently attractive price cuts.
A concern raised by the sharp decline in consumer sentiment since the Spring is that many households might have seen a sharp deterioration in their financial positions. These worries were given further substance by a sequence of very weak retail sales data in recent months. If the pick-up in this part of the survey is mirrored in an improvement in retail sales for the July/August sales period, a slightly less threatening interpretation can be suggested. If consumers are able and willing to respond to heavy price discounting, their current financial position may not be quite as stretched as feared. Instead, the sharp decline in consumer sentiment in recent months may reflect at least in part a precautionary downgrading of spending plans rather than a panic response to an unanticipated cash shortfall. In reality, there may be elements of precaution and pain intertwined in recent survey readings. It will probably take several months to judge which is the more significant influence.
Aside from an improvement in spending intentions, there were several other encouraging aspects of the August results. Consumers upgraded their assessment of general economic prospects and were also marginally less negative on the outlook for jobs. It should be emphasised that current survey levels remain very gloomy in absolute terms. The August ‘economy’ reading is still sharply lower than those seen before this Spring. That said, the fact that consumers noted a couple of encouraging developments in the past month suggest they haven’t entirely given up hope.
It is likely that a sharp easing in oil prices played a central role in bolstering consumer confidence in August. Between mid-July and mid-August, the price of a barrel of Brent crude dropped from just below $147 to just over $113 thereby reversing most of the increase seen since late April. A second source of good news for Irish consumers was the distinctly less threatening tone of comments by European Central Bank president Trichet that eased fears of a further rise in interest rates and even prompted some probably premature hopes for lower borrowing costs. Drawing together more favourable news on oil prices and interest rates Irish consumers judged that the outlook for the Irish economy in the coming year might not be quite as bleak as previously feared. While they were also marginally more positive in their views on job prospects, the notably more muted change in this element of the survey suggests that consumers continue to brace themselves for a lot more bad news on the employment front. Although there was another large rise in numbers on the live register and there were some significant layoffs during the survey period, there were also quite a number of new job announcements. So, this month’s newsflow on jobs wasn’t entirely bleak. However, Irish consumers are still overwhelmingly fearful of rising unemployment.
The drop in oil prices and less threatening news on interest rates made consumers less fearful about the economy as a whole. It also led to a less pessimistic assessment of the outlook for personal finances in the coming year. A surprisingly sharp drop in inflation in July likely helped in this regard. Interestingly, while consumers upgraded their view of household finances in the year ahead they also downgraded their judgement on how spending power had evolved in the past twelve months. Clearly, they recognise how tough things have gotten but they may see a glimmer of light at the end of the tunnel. It is probably premature to conclude that the worst news on inflation is behind us. Looming increases in energy costs will further crimp purchasing power but the fact that consumers are capable of discerning both positives and negatives in a generally poor environment has to be seen as encouraging.
In summary, the small improvement in Consumer Sentiment in August while welcome should not be thought of as signalling a turnaround. Current readings remain consistent with extremely weak levels of household spending. However, the fact that Irish consumers remain capable of discerning good news in the shape of heavy price discounts by retailers, lower oil prices or more favourable news on interest rates is a welcome development. This openness to good news, while encouraging, also raises the question as to where more positive noises might come from. This increases the pressure on the Irish government to come up with a credible response to current problems before long.