Consumer sentiment showed a surprise rebound in November as falling fuel and mortgage costs eased the pressure on household spending.
According to the KBC Ireland/ESRI Consumer Sentiment Index, consumer confidence rose to 44.8 in November, compared with 42 in October. Any reading below 50 indicates contraction. The corresponding figure for November 2007 was 63.1.
Austin Hughes, chief economist of KBC Ireland, said energy costs and interest rates were falling sharply "reversing the painful impact of a surging cost of living in recent years".
As a result Christmas would be "cautious rather than cancelled" and Mr Hughes expects sentiment to improve next year as interest rates fall again.
Spending had been curtailed by higher fuel bills and rising loan repayment costs since 2006 and in most households these have been the "major negative shock to living standards", he said.
The index was compiled from a survey of over 900 people carried out during the first two weeks of November.
During the period in question, the European Central Bank reduced interest rates to 3.25 per cent, the second 0.5 per cent cut in two months. Petrol prices have fallen from an average of €1.23 a litre in October to €1.13 this month.
Mr Hughes said with a third interest rate cut expected before Christmas, consumers who had braced for bad news had got a pleasant surprise. "You can see it from the credit card data from the Central Bank. Consumers have been paying off their credit cards in anticipation of difficult times but have got a pleasant surprise".
David Duffy, economist with the ESRI, said the underlying message was that consumers remained cautious.
Although the overall index showed a small improvement consumers held a negative outlook for the economy and the labour market in November.
"Current economic uncertainty is being reflected in a shift in consumer perceptions. A substantial part of the improvement in sentiment is due to a move from a negative to a neutral outlook by respondents, suggesting a more uncertain and cautious outlook by consumers", Mr Duffy said.
Despite the rise in sentiment for November, 82 per cent of those surveyed expect economic conditions in the State to worsen next year and 91 per cent believe unemployment will increase in 2009.
