Cheaper fuel, mortgages boost sentiment

CONSUMER SENTIMENT ended 2008 on a relative high as sharp reductions in mortgage and fuel costs boosted household spending power.

According to the KBC Ireland/ ESRI Consumer Sentiment Index, consumer confidence rose to 50.2 in the 12 months to December, up from 44.8 in November.

This is the strongest reading since last April, and December was the fourth month out of five in which consumer sentiment has improved since its record low of 39.6 in July. The 50 mark separates growth from contraction.

Austin Hughes, chief economist of KBC Ireland, said that, while the improvement before Christmas was surprising, it reflected a significant strengthening in household spending power.

ESRI economist David Duffy said consumers' perception of their household financial situation improved in December, "helped by interest rate cuts and pre-Christmas sales".

The European Central Bank cut interest rates three times in just two months before Christmas, lowering its benchmark interest rate from 4.25 per cent to 2.5 per cent.

During the survey period, oil prices fell from $57 to $46 per barrel as they continued to retreat from a July peak of $147 a barrel.

The combination of these factors, coupled with a sharp fall in inflation to a three-year low of 2.5 per cent in November, significantly improved consumers' spending power, Mr Hughes said.

Despite the increased spending power, Irish consumers remain "extremely cautious" and sentiment data over the year showed consumers were fearful about the economic outlook and frugal in their spending. This was evident in changing spending patterns, including a 17 per cent drop year-on-year in credit card spending in the month of November. Payments to credit cards exceeded new spending in all but one month last year.

However, the drop in key living costs means that, for consumers whose jobs are not under threat, "the pain they suffer in 2009 may not be nearly as severe as might be inferred from most commentary on the economy", Mr Hughes said.