Falling mortgage and fuel costs boost consumer confidence

Consumer sentiment ended 2008 on a relative high as sharp reductions in mortgage and fuel costs boosted household spending power.

According to the KBC Ireland/ ESRI Consumer Sentiment Index, consumer confidence rose to 50.2 in the 12 months to December, up from 44.8 in November.

This is the strongest reading since April 2008 and December was the fourth month out of five in which consumer sentiment has improved since its record low of 39.6 in July. The 50 mark separates growth from contraction.
Austin Hughes, chief economist of KBC Ireland, said while the improvement before Christmas was surprising, it reflected a significant strengthening in household spending power.

“For the past couple of years Irish consumer confidence has been soured by a seemingly relentless surge in living costs. So, the extremely rapid reversal of a painful squeeze on spending power in recent months has had a significant positive impact on sentiment,” he said.

ESRI economist David Duffy said consumers’ perception of their household financial situation improved in December, "helped by interest rate cuts and pre-Christmas sales".

The European Central Bank cut interest rates three times in just two months before Christmas, lowering its benchmark interest rate from 4.25 per cent to 2.5 per cent.

During the survey period oil prices fell from $57 to $46 per barrel as they continued to retreat from a July peak of $147 a barrel, resulting in lower petrol, diesel and home heating oil costs.

The combination of these factors, coupled with a sharp fall in inflation to a 3-year low of 2.5 per cent in November, significantly improved consumers’ spending power, Mr Hughes said.

“In the light of some very gloomy news in the run-up to Christmas this [improvement] may seem a surprising result but it reflects a major boost to household spending power coming from the collapse in interest rates and oil prices,” he added.

Despite increased spending power Irish consumers remain “extremely cautious” and sentiment data over the year showed consumers were fearful about the economic outlook and frugal in their spending.

This was evident in changing spending patterns including a 17 per cent drop year-on-year in credit card spending in the month of November, with payments to credit cards exceeding new spending in all but one month last year.

However, the drop in key living costs means that for consumers whose jobs are not under threat “the pain they suffer in 2009 may not be nearly as severe as might be inferred from most commentary on the economy,” Mr Hughes said.

Consumers remain pessimistic on employment with nine out of ten believing job losses will rise this year. Mr Hughes noted the application of new taxes and public sector charges this month were likely to weigh on sentiment in the early months of 2009. “However, the December sentiment survey results suggest that Irish consumers haven’t entirely thrown in the towel”, Mr Hughes said.

The index was compiled from a survey over 900 people during the first two weeks of December.