Sharp oil price drop nudges sentiment up

A sharp drop in oil prices has driven a slight pick-up in Irish consumer sentiment, according to the latest figures. The IIB/ESRI consumer sentiment index has risen to 86.5 from 84.8 in August.

"There is little doubt that the sharp drop in oil prices from early August was the key factor behind improved consumer sentiment in September," said Austin Hughes, chief economist at IIB Bank.

Having threatened to top $78 per barrel in the first week of August, US crude oil prices dropped to $63 by the middle of September. Perhaps as important to sentiment as the drop itself was that earlier forecasts of the imminent approach of $100 per barrel completely disappeared, said Mr Hughes.

"The turnaround reduced fears about a sharply poorer economic outlook for 2007. However, it hasn't completely eased concerns about pressure on their personal finances," he said.

The spending power of the average consumer remains under significant pressure, with a hike of close to 20 per cent in electricity prices announced in early September, the ESRI said.

"Irish consumers are still very concerned about their household finances," said Mr Hughes. "Indeed, even as oil prices dropped, a near 20 per cent rise in electricity prices was announced. So, spending power and sentiment remain under significant downward pressure.

"As a result, the improvement in the consumer sentiment index in September was very limited and the underlying trend still seems to be downwards."

The main impetus for September's modest improvement came from a more optimistic assessment of future prospects, rather than current conditions, according to ESRI economist David Duffy.

"The three-month moving average for the index declined from 88.3 in August to 87.4 in September, suggesting that any recovery in confidence remains tentative," he said.

Considerations such as the broad economic outlook and employment prospects were the strongest elements of this month's survey, while consumers' assessment of their own financial situation remained fairly downbeat, the ESRI said.

Consumers are finding 2006 more difficult than expected, according to Mr Hughes.

"This is because living costs have risen rapidly and income growth has been subdued," he said.