Austin Hughes

Irish consumer sentiment suffered another sharp decline in March.  The IIB/ESRI Consumer Sentiment Index fell to 78.5 from 84.9 in February.  The March reading is the lowest since December 2003 and reflects increased nervousness about job prospects as well as the impact of a further rise in borrowing costs.

As was the case in February, the weakening in sentiment last month was broadly based, with 4 out of 5 of the main elements of the IIB/ESRI survey posting monthly declines.  The exception was consumers’ assessments of their own household finances in the past twelve months.  This probably reflects the impact of budget concessions being felt in monthly pay packets.  In addition, a scaling back in electricity prices would have helped.  However, these influences were overwhelmed by broad based weakness across the other aspects of the survey.

Although Irish consumers were fractionally more optimistic about the way their household finances had developed in the past twelve months, they were notably more pessimistic about the outlook for the coming year.  The ‘feel good’ factor that emerged tentatively in the wake of Budget 2007 has faded of late.  Perhaps surprisingly, there is little evidence that the maturity of about half of all SSIA accounts in March and April has had any uplifting effect on the mood of Irish consumers.  Instead, it seems likely that the delivery of the 7^th ECB rate rise of the current cycle on March 8^th coupled with the threat of further increases in the months ahead has made consumers feel a lot more uncomfortable about the outlook for household spending power.  A substantial rebound in energy costs also weighed on consumers last month. 

On the evidence of recent sentiment survey results, it seems the windfall boost to spending power from the SSIAs and a generous budget have been dwarfed by higher borrowing costs and energy prices.  The relevant arithmetic would suggest that for most Irish consumers positive influences on household finances should comfortably offset the negatives at present.  However, a notably poorer assessment of the general economic outlook and job prospects in particular means that consumers are now viewing the Irish economy through very dark-tinted glasses.

There is little doubt that the driving force behind the ‘feel bad’ factor now dominating Irish consumer sentiment is nervousness about employment prospects.  As was the case in February, this was the key reason for the weaker sentiment reading last month.  After a surge in layoff announcements in January/early February, there were several further high profile layoff announcements during the March survey period.  Among these, Motorola confirmed 330 layoffs in Cork, while a further 350 jobs were lost with the closure of Whelan Frozen Foods.  Proctor and Gamble announced 280 layoffs in Nenagh and concerns emerged over the future of 70 jobs at Ranbaxy in Cashel.  There were also substantial job losses announced by Zomax and Bourne electronics.  Although there have been a number of significant new job announcements of late, we continue to believe that heightened job insecurity is at the heart of poor sentiment readings at present.

While worries about the job market dominated, sentiment towards the broader Irish economy also weakened in March.  Such concerns likely reflect a diverse range of worries.  Clearly, poorer sentiment towards the housing market has particular significance given the importance of this sector to activity and employment in recent years.  In addition, world stock markets went through a turbulent period in late February/early March that would have tended to reinforce nervousness that all might not be well with the global economy. 

We feel current downbeat sentiment readings in relation to what is still a very healthy Irish economy also reflect a couple of subjective considerations.  It seems expectations had built that early 2007 would be exceptionally strong because the release of the bulk of the SSIAs was expected to flood the economy with increased spending and a pervasive ‘feel-good’ factor.  This meant expectations were probably unrealistically high among some consumers.  In the event, countervailing forces in the form of higher borrowing costs and greater uncertainty about jobs and the housing market have meant that the ‘feel-good’ factor has been notably absent and, instead, ‘feel-bad’ has prevailed as the dominant mood. 

A second ‘surprise’ for many Irish consumers is that while economic growth has been very strong on the basis of GDP data, the rise in per capita living standards may have disappointed because a bigger Irish economic cake is now being cut into more slices.  For example, we estimate GDP per head increased just under 3½ per cent in 2006, up, but not dramatically so, from a roughly 2½ per cent average rise in the preceding three years.  More importantly, the recent performance is sharply below the average rise of 7¼ per cent in GDP per head in the 1996-2002 period.  The latter is probably the sort of increase envisaged by consumers when the word ‘boom’ is used.  As a result, judged from the perspective of the average consumer, the current generally strong economic performance may be disappointing in terms of the scale of increase in individual living standards that it has delivered. 

It is not surprising that a general downgrading of the economic outlook and personal finances also meant the buying climate weakened again in March.  The current mood of Irish consumers is clearly one of caution if not outright disappointment.  As the graph above shows, this implies retail spending could fail to match some of the more optimistic projections.  That said, rapid population increase means aggregate household spending should remain reasonably healthy in 2007 and beyond.