Hopeful Budget expectations help consumer confidence

Consumer confidence grew sharply in October as households looked ahead to a generous December Budget, according to the latest survey from IIB Bank and the ESRI.

The consumer confidence index climbed to the highest point recorded since mid-2001, last month. The increase, from 95.5 to 99.6, was driven by a sharp improvement in consumers' expectations on their future financial situations.

IIB chief economist Mr Austin Hughes said the growth in confidence probably reflected expectations of a giveaway Budget next month.

The future expectations element of the overall index posted 99.3 in October, up sharply from 91.7 in the previous month. This was the highest level recorded since February 2001.

The better mood did not translate into confidence about consumers' current finances, however, with this part of the index posting a decline from 101 to 100 in October. The index of current expectations has fallen back in six out of the last 10 months.

Mr Hughes believes this "dichotomy" reflects the current state of the economy and consumer fortunes in particular.

He said consumers have been watching the positive trends in the public finances over the past few months and now believe that a generous Budget is on the way.

"Significant tax-cuts and spending increases seem the most plausible way that household spending power might rise to levels consistent with the optimistic tone," he said.

This means that the Minister for Finance, Mr Cowen, will need to tread a "fine line" between prudence and the need to avoid disappointing households next month, according to Mr Hughes.

He warned that a disappointment could leave consumer spending on a sluggish trajectory throughout 2005.

On the flipside, however, Mr Hughes said the risks of an "excessively generous Budget" are well-understood. A number of analysts have warned that a giveaway Budget could cause problems for inflation and competitiveness.

An IIB analysis of the two elements of the October consumer confidence index concludes that the gap between expectations and current perceptions is bridged by borrowing.

"We think the disjoint between optimism about the future and concern about the current situation offers a plausible explanation of the current strength of household borrowing," said Mr Hughes.

Central Bank figures released last week show that household borrowing approached record levels in September.

Borrowing both supports current spending and facilitates the purchase of assets that may be justified by faster future income growth, Mr Hughes said.