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Consumer sentiment fell in July. The overall ESRI/IIB Bank Irish Consumer Sentiment Index stood at 74.7 in July, compared to a figure of 83.2 in June. The corresponding figure for July 2006 was 90.9. The 3-month moving average fell to 81.2 from the 84.0 recorded in June. The 3-month moving average stood at 90.8 in July 2006. The Consumer Sentiment Index comprises two sub-indices; an index of consumer expectation that focuses on how consumers view prospects over the next 12 months and an index of current economic conditions, focusing on the present situation. The Index of Consumers Expectations is based on consumers’ perceptions of their future financial situation, the economic outlook and employment expectations. The index value for July stood at 63.9, compared with 74.1 in June, primarily due to consumers becoming more concerned about the outlook for overall economy and for the labour market over the next twelve months. Consumers’ perception of their current situation also weakened in July. The value for this particular index was 90.8 in July, compared with 96.6 in June. This is due to consumers becoming more cautious in their perception their current household finances and the current buying climate. The data was obtained from telephone interviews during the first two weeks of the month with over 800 completed questionnaires. The data were re-weighted in line with gender, age and level of educational attainment to ensure the data is fully representative of the national population of adults. Each index is calculated by computing the relative scores (the percent giving favourable replies minus the percent giving unfavourable replies (the balance), plus 100) for each question used in the different indices. Those who reply “Don’t Know”, “Remain the same” are excluded from the index calculations. Each relative score is rounded to the nearest whole number. The sum of the relative scores is then divided by the base period total for each index. Comment by Austin Hughes, Chief Economist, IIB Bank:
Irish consumer sentiment tumbled in July to its weakest level in nearly 4 years. Concerns about a weakening property market and a broader economic slowdown fuelled increased worries about the outlook for employment and activity in the coming year. The IIB/ESRI Consumer Sentiment Index fell to 74.7 in July from 83.2 in June. Last month’s reading was the weakest since October 2003. The fall in the Index between June and July was also the largest monthly fall since September 2005. So, the drop in sentiment reported for July signals a significantly gloomier mood among Irish consumers.
Last month’s deterioration in sentiment was largely driven by increased concerns about the general economic outlook and the housing market in particular. The related threats of a significant step-down in economic growth and a build-up of property related difficulties caused consumers to mark down their views on the outlook for employment in the coming year.
In the wake of a number of recent forecasts predicting substantial job losses in construction and broader competitiveness reflected difficulties for the Irish economy, it is scarcely surprising that consumers have become more pessimistic about the outlook for jobs. In July, 68 per cent of Irish consumers indicated that they expect unemployment to increase in the next twelve months. This is the largest proportion reported since October 2003 and, as only 9 per cent expect jobless numbers to fall in the next year, the July reading implies a very gloomy outlook for employment has taken hold among consumers.
In marked contrast to some weak readings in this element of the survey earlier this year, the deterioration in July did not reflect a spate of high profile layoffs. Instead, the recent survey period was notable for quite a number of new job announcements. However, the mood of consumers seems to have been shaped by several high profile forecasts encompassing a notable weakening in economic growth and the risk of widespread job losses in the construction sector in coming years.
A poorer jobs outlook also led consumers to mark down their outlook for the broader economy. As a result, 52 per cent of consumers now take a negative view of the Irish economic outlook compared to just 14 per cent who hold a positive view. This is the gloomiest balance since September 2005 when the combined influence of Hurricane Katrina, high profile job losses and Eddie Hobbs exposé of ‘Rip Off Republic’ prompted a particularly gloomy judgment. As recently as the start of 2006 the proportions of consumers holding positive and negative views on economic prospects were broadly similar.
While we think the July sentiment reading reflects a step-down in the pace of economic growth we don’t think it signals a slump. The range of economic forecasts for the year ahead now runs between 3 and 5 per cent. At the beginning of last year, predictions of 7-8 per cent growth in 2007 were commonplace. So, in terms of the general performance of the Irish economy, the past year and a half has been a major disappointment to Irish consumers. At the beginning of 2006 a buoyant housing market and the looming maturity of SSIAs prompted expectations of a spending spree without parallel. We suggested that those expectations formed in the early part of last year on the basis of forecasts proclaiming the return of the Tiger economy could be vulnerable to disappointment. For much of the intervening period, Irish consumers, alongside those paid to forecast the Irish economic outlook, have been revising down their assessment of the likely intensity of economic growth in 2007 and the outlook for subsequent years. As the Diagram above suggests, the current judgment of consumers as expressed in the July sentiment survey seems to suggest an expectation of very modest or possibly even meager economic growth in the coming year.
While the Irish economy might have failed to live up to earlier frothy expectations, it may be equally difficult to ‘live down’ to some of the more gloomy prognostications now circulating. We think the mood of Irish consumers is now fairly cautious. So, in the absence of some completely unanticipated and major negative shock, it would seem that Irish consumers are braced for quite testing conditions in the coming year.
It remains the case that consumers have the wherewithal to sustain a healthy increase in spending in the next twelve months even if they have become more circumspect about undertaking major commitments such as house purchases. With the population and employment still increasing strongly, a reducing tax burden and the support offered by SSIAs, it should be recognized that softening consumer sentiment in the first half of 2007 has coincided with a 7½ per cent rise in retail spending. It is significant that in a generally negative July sentiment survey, consumers reported a marginal improvement in the outlook for their own household finances in the next twelve months. As a result we think the July consumer sentiment reading is consistent with the persistence of healthy Irish economic growth although both the pace and intensity of that growth may be somewhat lower than had been expected either by economists or consumers. © Copyright 2007 by Finfacts.com |
