• Large January bounce reverses sharp drop recorded in December
• Positive news flow on Irish economy encourages less pessimistic view of coming year
• Worries about Budget 2013 impact on spending power ease somewhat but remain a concern.
• ‘Noisier’ sentiment index of late reflects considerable uncertainty as well as fragile financial situation of Irish consumers.
Irish consumer sentiment rose sharply in January completely reversing the large drop recorded in December. We think four factors likely contributed to this turnaround. First of all there was a significant amount of encouraging news flow in relation to the outlook for the Irish economy through the final days of 2012 and the early days of the New Year. Second, as the impact of fairly apocalyptic headlines in the immediate aftermath of Budget 2013 faded, consumers appear to have become a little less fearful about the damage Budget measures might do to their household finances. Third, it may be that some respite from financial and economic news flows over the Christmas period may have contributed to a slightly less fearful Irish consumer in January. Finally, heavy price discounting in Christmas sales brought about the usual seasonal improvement in the buying climate.
Encouraging as the January sentiment survey results may appear, we would repeat some of the caution we expressed in relation to the December data. The volatility of the market through the second half of 2012 and now in early 2013 highlights the fragility of sentiment and the degree of nervousness that the average Irish consumer feels about economic and financial prospects. While the January results hint at some tentative improvement in confidence through the past year, the level of the index remains some significant distance below its long term average of 86.1. It also remains the case that negative responses outweigh positives for each of the five main survey questions. So, while Irish consumers were a little less afraid in January, they remain fairly apprehensive about their future.
We think the January sentiment results are consistent with a number of other recent signs that domestic economic activity seems to be stabilising and may even be starting to show a slight and patchy improvement. A month ago we suggested the fall in the sentiment index exaggerated any weakening in domestic economic conditions towards end year. We think the monthly change in the index in January looks similarly outsized. More significantly, fluctuations in these data likely reflect the fact that any turnaround in domestic economic conditions is set to be an uneven process and one marked by ‘noisy’ data that make it hard to ascertain exactly how healthy or unhealthy domestic conditions might be at a particular point in time.
The KBC Bank Ireland/ESRI Consumer Sentiment Index rebounded to 64.2 in January from 49.8 in December, completely recovering from the sharp fall seen in the final month of 2012. The three month moving average of the series which often gives a better indication of the underlying trend also improved in January but, as diagram 1 below shows, the increase was altogether more modest to 59.3 from 58.1. As the diagram also indicates, a trend improvement in sentiment was evident up to the autumn but there was a partial retracement through late 2012. This likely reflects a tougher global economic backdrop and particular concerns about the impact a range of austerity measures in Budget 2013 would have on already strained household finances. As noted above, the January results may signal the worst is over in terms of these concerns but because Irish consumers remain cash-strapped and cautious, sentiment and spending are unlikely to show any marked improvement in the month ahead unless consumers perceive a dramatic change in prospects—such as might follow a significant deal on Ireland’s bank-related Public debt.
A Slightly Happier New Year For US And Euro Area Consumers
The improvement in Irish consumer sentiment in January coincided with modest increases in similar indicators in a range of other countries. In the US, the comparable sentiment index compiled by the University of Michigan showed only a limited retracement of the sharp fall seen in December. While the threat of a severe and arbitrary pull back in Public Spending and increases in taxation, commonly described as the ‘fiscal cliff’, was averted, most US households still face a significant increase in taxation and cuts in Government spending have been postponed rather than abandoned. So, it was hardly surprising that US consumers did not feel notably more confident last month. Sentiment also improved slightly in the Euro area, led by an easing in concerns about the economy. As in the case for Irish and US data, it should be noted that current readings remain relatively weak by historical standards. While it would appear that there was some positive New Year effect on consumer sentiment across a range of economic zones, this was not of a magnitude that would suggest consumers now take a fundamentally more positive view of their circumstances at the start of 2013.
Consumers Less Pessimistic About Irish Economy
Looking through the details of the Irish sentiment survey, it remains the case thatnegative responses outweigh positive responses in each of the five main areas, but in each instance there was a significant improvement in the tone of responses between the December and January readings. Far and away the sharpest improvement was reported in relation to prospects for the Irish economy in the next twelve months. This seems to reflect a number of positive developments in late December and early January that bolstered hopes for an improvement in economic activity. These included several upbeat economic forecasts, some better than expected economic data, positive bond market developments and a range of comments that suggested there was growing European support for a deal on Ireland’s banking related public debt. In addition, house price data for November added to a range of reports that suggested the Irish residential property market has begun to stabilise.
Overlaying these domestic developments was a very strong start to the year by global financial markets that reflects growing optimism that the worst might be over for the world economy and, in particular, for the euro area. It is not possible to rank the separate influence of each of these elements. However, it is likely that the coincidence of a wide range of positive signals meant that the overall boost to sentiment was greater than might be suggested by the sum of the individual elements. Reflecting these developments, positive views on the Irish economy increased from 18 per cent of responses in December to 31 per cent in January—the highest proportion since June 2010. That said, the survey suggests circumstances continue to differ widely among Irish consumers. While negative responses remain more plentiful than positive ones, the 42% of consumers that felt the Irish economy would weaken in 2013 was sharply down on the 61% who gave negative responses in the December survey.
Jobs Worries Ease But Haven’t Disappeared
Not surprisingly, a less negative assessment of the general economic outlook fed through to responses to the survey questions on the outlook for the jobs market. This element of the survey reported its healthiest reading since June 2007. However, the fact that negative responses still outweigh positives by 42% to 27% underlines how entrenched gloom about the jobs market has been since the downturn in sentiment began back in 2006. Indeed, the fact that only one in four consumers expect unemployment to fall in the coming year might hold out some possibility of mildly positive surprises during 2013. In addition to the change in thinking on the Irish economy, the improvement in this element of the survey in January likely reflects news of a continuing if modest decline in numbers on the live register, some positive job announcements including encouraging end year statements by the IDA and Enterprise Ireland as well as a number of anecdotal reports that suggest new hiring was beginning to run ahead of layoffs of late.
Household Finances Remain A Concern
The responses to the two ‘macro’ questions were the strongest elements of the January sentiment survey but there was also a significant retracement of the sharp weakening in consumers’ assessments of their household finances reported in December. This was particularly true of consumers’ view of how the financial situation of their households had changed over the past twelve months. Again, it must be emphasised that this improvement came off an extremely weak base. The January survey still found that 60% of consumers felt their personal finances had worsened in the past year whereas only 6% judged that they had improved. However, this represented a notably stronger reading than December. The improvement may owe something to declining inflation, some limited increase in earnings, signs of stabilisation in the residential property market and indicators of heavy price discounting by retailers around the Christmas period.
The turnaround in consumer thinking in relation to prospects for their household finances over the year ahead was altogether more muted by comparison with their thinking on the past twelve months. While this element of the survey did show a significant increase from the depressed level of December, January’s was the second weakest reading since February of last year. So, it is clear that concerns about the impact of Budget 2013 have not disappeared. However, the Christmas break may have encouraged a slight easing in the degree of worry compared to that expressed at Budget time and captured in the December survey. The key unknown at this point is whether Irish consumers now fully discount the likely hit to their spending power to come from a range of Public Spending and taxation changes that will hit household incomes at various stages through the coming year.
In our commentary on the December sentiment survey we suggested the sharp decline seemed very much at odds with anecdotal reports of a buoyant Christmas by retailers. In the interim, official retail sales data proved weaker than industry reports had suggested, VAT receipts for January 2013 were disappointing and January 2013 car sales were down sharply on a year earlier. We still think the December survey results exaggerated the deterioration in economic conditions but the influence that a marked improvement had not taken hold seems to have been borne out by other data.
As is usually the case in January—when consumers are focussed on post-Christmas sales, the buying climate element of the sentiment survey recorded a decent increase last month. However, as in the case of forward looking assessment of household finances, this still left it some way below the comparable November reading. Although this reading may be consistent with some increase in the official measures of non-car retail sales last month, the broad picture is still one of an Irish consumer that seems unable and/or unwilling to spend on much beyond necessities—unless they are presented with exceptional bargains.
What Do We Make Of Large Changes In Sentiment?
The scale of the drop in consumer sentiment in December took us by surprise even if the direction of the change didn’t. The same is probably true of the January data. We expected some retracement but not as complete as occurred last month. There are a number of possibly complementary reasons for the degree of the turnaround in sentiment of late. As indicated last month, the exceptional volatility in recent sentiment data could be indicative of the extent of uncertainty there is at present about current conditions and prospects. The particular ‘event risk’ posed by Budget 2013 likely amplifies this effect. It may also be the case that as some consumers sense the Irish economy could be close to or at a turning point after a protracted and painful deterioration that the sentiment index almost inevitably becomes more ‘jumpy’. This is because an uneven and patchy turn may be leading consumers to migrate forward and back from seeing the glass as half empty or half full.
Volatility in the December and January surveys could also be due to a deterioration in the ‘signal to noise’ ratio of the survey of late. We examined the data thoroughly for any possibility of ‘production’ issues but didn’t find any indication of problems either in the raw data or the process through which the index is constructed. We also re-examined the issue of seasonality using a couple of different seasonal adjustment factors. While these suggested a somewhat more modest recovery in January than seen in the unadjusted series—largely because of the post-Christmas sale effect, these adjustments don’t really alter the picture painted by the non-seasonally adjusted data.
A comparison of the details of the December and January surveys suggest the turnaround in sentiment is not simply a mechanical bounce back. The deterioration in December was led by concerns in regard to household finances that likely centre on Budget 2013 whereas the strongest rebound in January came in more ‘macro’ elements of the survey. So, while we regard the monthly changes in both December and January as exaggerated, we think they may reflect changes in the immediate focus of consumers and in their assessment of the economic and financial landscape.
This ‘openness’ or uncertainty on the part of consumers at present might suggest that the degree of success or otherwise that consumers judge the Irish Government to have in securing meaningful concessions from our European partners in regard to Ireland’s banking related public debt has the potential to exert a decisive influence on consumer sentiment in coming months. In turn, any marked change in sentiment could feed through to spending in a way that has a significant impact on the health of domestic economic activity as 2013 develops.