Irish consumer confidence continues on a cautious but positive path in February
Fractional rise in consumer sentiment hints that current cost-of-living pressures remain difficult but not quite as bad as feared.
Mild weather, lower pump prices and more resilient Irish economy likely contribute to slight easing in consumer concerns.
Improvement in thinking on jobs market on easing in tech concerns and sustained strength in jobs data, suggest many consumers think “leprechaun economy” is not simply a fairy tale.
We may be past peak fear but February sentiment survey suggests fear factor still pronounced as consumers still cautious and cash constrained, leading to weaker spending plans.
A year on from the Russian invasion of Ukraine, Irish consumer sentiment is reflecting (yet again) the resilience of the Irish economy but the draining impact of the shock on the cash and confidence of Irish consumers are even more forcefully evident.
Special survey question suggests that 1 in 4 consumers are holding additional ‘pandemic’ savings for ‘rainy day’ emergencies while 1 in 10 consumers are holding funds for a particular long-term purpose. So, downside risks to consumer spending in near term but some upside risks on eventual recovery in Irish consumer confidence.
CONSUMER MINDSET REPORT
Read commentary and view charts related to this month’s Consumer Sentiment Index.
Broadly steady February sentiment reading hints at underlying improvement
Irish consumer sentiment rose fractionally in February, the fourth improvement in the Credit Union Consumer Sentiment Index in the past five months. The modestly improving trend in confidence of late hints that we may have moved past ‘peak fear’ in relation to consumers concerns around cost-of-living pressures and the threat of markedly weaker economic conditions.
However, the February reading also suggests that while concerns may be easing, there is absolutely no sense that they have ended. The sentiment survey clearly signals that Irish consumers remain cautious and constrained in their spending power. So, the February data suggest that a significant fear factor remains a key influence on Irish consumer sentiment.
While we previously suggested the sentiment survey was signalling an element of resilience through last year that hinted Irish consumers were down but not out, we would interpret recent readings as suggesting consumers feel their concerns may be easing but far from over.
The slight increase in consumer confidence in February suggests no major change in consumer thinking this month. As the sentiment index has fallen in February in 18 of the previous 26 years, likely reflecting post-Christmas bills and dark and cold weather, the marginal pick-up in confidence this month may hint at an underlying improvement that likely comes from some modest easing in concerns around cost-of-living pressures.
This may be due in part to relatively mild and dry weather through the survey period that should translate into lower than feared heating bills. The ongoing easing in wholesale energy costs should also have helped through the prospect of less threatening utility bills in the months ahead. Finally, the continuing health of economic indicators such as exchequer returns and unemployment data through the survey period may have lessened nervousness that a marked slowdown was inevitable and possibly underway.
Could improving confidence lead to stronger consumer spending through a run-down in savings?
While theory might suggest that consumers would build up savings during economic ‘good times’ and draw them down when facing difficulties, much of the evidence from Ireland and elsewhere suggests that households tend to save more during more difficult or uncertain times and run these down when consumers become more optimistic and ‘animal spirits’ take hold. This holds out the possibility that improving consumer sentiment in 2023 could unlock some pandemic savings and boost consumer spending.
Although the ‘lockdown’ element of the pandemic prompted a build-up of forced savings in Ireland and other countries, official data suggest the that in the third quarter of 2022, the savings rate of Irish households was well down from the Quarter2 2022 pandemic peak of 33.8% but still exceptionally elevated at 19%-the pre-Covid norm was around 10%. In broad terms, this figure might appear consistent with the caution evident in the corresponding consumer sentiment data but it also seems a touch high given the indications of widespread financial strains in the sentiment survey.
The February 2023 sentiment survey contained a special question examining the uses to which additional pandemic savings built up during the pandemic were put. The responses shown in the table below suggests that the rundown of savings is unlikely to give a dramatic boost to consumer spending in the near term, but it could give extra impetus to an eventual upturn.
Saving during the pandemic
As the chart indicates, about 50% of Irish consumers saved more during the pandemic. 15% of all consumers have spent those savings in the interim. Some of this group may have used those savings as a buffer against cost-of-living pressures. A further 10% of all consumers have set these extra savings funds aside for a specific long-term purpose such as home improvements or education costs.
Some 25% of Irish consumers say they have built up additional savings for ‘rainy day’ purposes. This reflects a still pervasive 'fear factor' on the part of Irish consumers. Some element of this additional ‘savings’ is likely to be in the form of debt reduction such as cutting amounts owed on overdrafts or credit cards. However, much of it is likely seen in a build-up of cash savings in the banking system.
Central Bank data show that, in the year to December2022, household deposits rose at a slower pace than prior to the pandemic, an outturn consistent with these survey results. Drawing on the same Central Bank data set, we estimate that household deposits are now approximately €15 billion higher now than they would be if the pre-pandemic trend in deposit growth had persisted.
Although savings held for specific purposes will eventually find their way into the economy, this is likely to happen in a phased manner. However, an easing in the current 'fear factor' and an allied sharp improvement in consumer sentiment might see some winding down of those savings held on a ‘precautionary’ basis.
On the admittedly strong assumption that savings are evenly distributed across households, we think a gradual release of a significant element of such savings might see between €5 and €10 billion percolate through the Irish economy on a marked pick-up in consumer confidence.
While current cost of living pressures suggest continued caution in sentiment and downside risks to consumer spending are likely to persist in the short term, these results hint at a tilt towards upside risks when such constraints eventually ease.
The Credit Union Consumer Sentiment Survey is a monthly survey of a nationally representative sample of 1,000 adults. Since May 2019, Core Research have undertaken the survey administration and data collection for the survey. The survey was live between the 3rd and 20th February 2023.
