Consumer sentiment dips in May

Irish consumer confidence weakened last month due to the negative impact of the Budget on household finances and concerns over the strength of the economy.

The KBC Ireland/ESRI measure of sentiment fell to 45.5 in May from 46.8 in April as worries over falling household income and rising fuel prices offset another cut in interest rates by the European Central Bank (ECB).

Austin Hughes, chief economist at KBC Ireland, noted the divergence between consumer confidence in the US and Ireland last month.

A combination of stimulus measures and a recovery in stock market values had provided US consumers with a boost, something “that their Irish counterparts clearly lack”.

A forecast last month by the ESRI that 300,000 jobs could be lost in the recession while the debate on policy responses to the bank crisis and the weakness in the public finances had “generated far more heat than light,” he said.

The impact of higher unemployment and a sharp decline in aftertax incomes were “a particularly powerful source of ‘feelbad’ for Irish consumers at present,” he added.

Another factor undermining Irish consumer confidence last month was an increase in oil prices and Mr Hughes noted that the sequence of falling borrowing and energy costs since last autumn could be coming to an end.

The ECB cut interest rates by 0.25 per cent last month to a record low of 1 per cent and has cut rates by 4 per cent since last October, leading to a fall of €560 in the cost of monthly repayments on a typical €300,000 mortgage over 30 years.

The May index was conducted during the first two weeks of the month and included the ECB rate cut but not, for many people, the full impact of tax changes contained in the April Budget.

While Irish consumer sentiment remained weak Mr Hughes said the trend over the past few months suggested the fall in confidence “may be in the process of bottoming out”.

He pointed to a rise in the three-month moving average to May, the first rise since January, to support this assessment.

Mr Hughes added that a firming of consumer confidence in many European countries may be because they have not yet started the “adjustment in employment and taxation that is both painful and inevitable”.

ESRI economist David Duffy said the forward looking component of the index dropped from 27.7 in April to 23.8 in May as consumers became more concerned with the outlook for the economy, labour market and their household finances.

"In contrast, the index of current economic conditions rose slightly to 77.7 from the 75.1 recorded in April. However, this is due to a more positive perception of the current buying climate, presumably reflecting fall prices and continuing promotions by retailers.”