Consumer sentiment falls for sixth consecutive month

Consumer sentiment fell for the sixth consecutive month in July as concerns over rising costs led to caution among households.

The IIB/ESRI index of consumer sentiment, published this afternoon, dropped to a new record low of 39.6 last month, down from 42.2 in June. This is the lowest reading since the index began in 1996.

Austin Hughes, IIB chief economist, said a "double whammy" of rising interest rates and budget cutbacks had made Irish consumers more pessimistic about the outlook for their finances and "forcefully brought home to Irish consumers the prospect of tougher times ahead".

A "toxic" combination of rising oil prices – which gained almost $10 per barrel last month – and the marked deterioration in the Irish public finances "gave Irish consumers quite a lot to be gloomy about", he said.

"Rising borrowing costs and the risk of an increasing tax burden or, at very least, the absence of the cushion that generous budgets had provided in recent years mean the squeeze on household spending power is becoming even more painful," Mr Hughes added.

Mr Hughes said the declining confidence was being mirrored in other countries as data from the UK in July showed the weakest consumer sentiment since 1974 while France recently recorded its lowest reading in over 20 years.

Last month the rapidly weakening Exchequer position introduced a "new negative" for consumers, the report says. In previous years the impact of rising borrowing costs had been cushioned by tax cuts, the poorer budgetary outlook now meant tax increases were more likely.

"The sharp deterioration in the budgetary position through the first half of 2008 represents an important 'new' negative influence on Irish consumer sentiment as budget largesse has contributed forcefully to increased spending power in recent years."

Mr Hughes said the Government would have to chose between a stimulus package to encourage consumer spending or trying to limit the deficit in the budget.

Also evident last month was a pronounced downgrading of consumers' assessment of their household finances.

While consumers were more negative about the general economic outlook and employment prospects in July, "the re-assessment of their own spending power is a more recent phenomenon".

"Irish consumers seem to have adjusted to the 'macro' notion of a deep and possibly lasting economic downturn. Now they are beginning to get to grips with the pain this implies for their pockets", he said.

Nearly half of those surveyed expected their household finances to get worse over the next 12 monthsm according to David Duffy of the ESRI.

The consumer sentiment index is comprised of two sub-indices, one measuring consumer expectations over the next 12 months and the other their view of current economic conditions.

For the former the index for July dropped to 23.3, down from 26.4 in June. Consumers' perception of the current situation also fell last month, dropping to 63.8, from 65.7 the previous month.

The index is complied by telephone interviews with over 800 people weighted for gender, age and standard of education.