The deterioration in the public finances combined with weaker stock markets has triggered a sharp decline in consumer sentiment on concerns about economic prospects.

The consumer sentiment index compiled by IIB Bank in conjunction with the Economic and Social Research Institute (ESRI), recorded a sharp decline in July. The index fell from 89 in June to 78.3 in June. This decline in consumer confidence mirrors similar perceptions among consumers in Britain and the US.

IIB economist Mr Austin Hughes said the July figure was unusually large and was the third-biggest drop in six-and-a-half years. "While we will look for confirmation in August and September figures, the July fall hints at a significant reappraisal of the economic outlook on the part of Irish consumers."

Mr David Duffy of the ESRI noted that the decline is particularly sharp in consumers' assessments of the general macro-economic situation and the outlook for jobs.

An important distinction between the declines in consumer confidence in the Republic and the US is that Irish households aren't suffering the same direct blow to personal finances from the drop in world stock markets as those in the US.

Mr Hughes said this suggests that Irish consumers are more concerned about the knock-on effect of stock market turmoil on the health of the global economy. He does not believe there will be a sharp decline in household spending but cautions that even a modest downturn in spending could inflict further damage.