Irish consumer sentiment fell sharply in February on a notably poorer outlook for the Irish economy and jobs that translated into poorer household income prospects.
The KBC Bank/ESRI consumer sentiment index fell to 86.5 in February from 98.8 in January. While some pull-back in sentiment in February was not entirely surprising, the scale of decline was unexpected.
The 12.3 point drop in the index in February was the largest monthly fall since Dec 2012 (and the third largest drop in the 23 year history of the index). As a result, the sentiment index fell to its lowest level since November 2014.
According to the ESRI, the scale of the deterioration in February seems unusually large and there could be some corrective rebound in the next month or two.
A spokesperson for the ESRI says they believe that the outlook for the Irish economy or the prospects of Irish consumers deteriorated dramatically last month. Consequently, we don’t envisage any sharp pull-back in spending.
However, the February survey period did see a number of developments that may have unnerved many consumers and prompted an outsized drop in confidence. If this persists, the ESRI would expect consumer spending to move onto a weaker path.
Political developments in the UK from mid-January, when the British government’s plans were heavily defeated in parliament, appeared to notably increase the risk of a ‘no deal’ Brexit in a couple of months’ time. At the same time, on the domestic front, nurses’ strikes and related debates about pay and conditions in the public sector as well as controversy about the spending over-run on the national children’s’ hospital may have harked back to darker days in Irish industrial relations and related issues about management of the public finances management as well as raising broader questions about the nature of the recovery in recent years.
However, the pronounced drop in the Irish consumer sentiment index for February was not reflected in similar movements in comparable indicators for other countries. In the Euro area, consumer confidence increased marginally while in the UK there was a surprising if marginal improvement prompted by an improved economic outlook and stronger spending plans implying dramatically different assessments of key developments on either side of the Irish Sea.
The ESRI believe that for a variety of reasons, including a less apocalyptic outcome than feared thus far, UK consumers may either be significantly underestimating the economic costs to them of a disorderly Brexit or may view economic fallout as secondary to other considerations.
In addition to increased risks of a ‘no deal’ Brexit and a focus on the impact that might have on the Irish economy, the February period was notable for a very high profile nurses strike and controversy about a large over-run in the projected cost of a national childrens’ hospital. These developments may have painted a picture of significant problems in industrial relations and broader expenditure management issues in the public sector.
While such developments are notably different from the recent US government shutdown, they may have had similar type effects on consumer confidence. In the case of Ireland, this might have been amplified by a broader sense of worsening prospects fuelled by growing and pressing concerns in relation to Brexit.
Chief economist for KBC Bank Ireland, Austin Hughes, added: “Some slippage in consumer sentiment was expected in February but the scale of decline was a surprise. It likely reflects growing fears that the UK could crash out of the EU in March following a series of votes in the British parliament during the survey period. At home, the nurses’ strike and the overrun in spending on the children’s’ hospital may have also increased concerns about Irish economic prospects.
“The fall in Irish consumer sentiment in February contrasted with modest gains in confidence indicators in the UK and US. We think UK consumers may be underestimating the prospective consequences of a ‘no deal’ Brexit. In the US, sentiment recovered from a drop that was due at least in part to the recent government shutdown as well as nervous financial markets. With the end of the nurses’ strike, improved hopes that a no deal Brexit may be avoided could prompt some improvement in Irish consumer sentiment in March.”