Budget hits consumer sentiment

Consumer sentiment weakened last month, pushed down by the dampening effects of Budget 2003 and general concerns about economic conditions, according to new data produced by IIB Bank and the Economic and Social Research Institute (ESRI).

Sentiment has reached its lowest ebb since the IIB/ESRI index was first measured seven years ago.

The index fell to 63.8, down from 66.5 one month previously, as households said they were less confident about current and future conditions.

IIB chief economist Mr Austin Hughes said the numbers suggested that consumer sentiment was unlikely to improve significantly in the near future.

He also pointed out that the December drop was at odds with trends in other western economies such as France and the US.

"This suggests that specifically domestic concerns are weighing on sentiment at present," Mr Hughes said.

He cited the "complexion of Budget 2003" as a particularly negative factor.

He also singled out a perceived deterioration in pay prospects in the face of a weakening economic position and inflation as adding to a "squeeze" on household spending power.

December's Budget appears to have had a greater impact on consumer sentiment than the European Central Bank's 50-point reduction in interest rates, which prompted cheaper mortgages in the Republic, according to the analysis.

The index shows that the majority of Irish households noted no improvement in their financial circumstances in the year to December.

Households' expectations for their personal financial situation over the coming 12 months also worsened, but at a slightly more moderate pace.

IIB is predicting that consumer spending will moderate in an "orderly" fashion this year, growing by 2.5 per cent as a gradual adjustment continues to the end of the boom.

The index shows that consumers were less confident about making "a major purchase" last month than they had been at any point since 1996.

Just 22 per cent of consumers felt that December was a good time to spend a large amount of money, while 29 per cent thought the opposite.

At the height of economic buoyancy, the numbers replying "yes" to this question exceeded those answering "no" by as many as 40 percentage points.

"This could be regarded as a rough barometer of the intensity of the 'feel-good' factor in the economy," according to Mr Hughes.