Consumer sentiment bounces back but vast majority expect austerity

Irish consumer sentiment bounced back in May but remained within the lowest 5 per cent of readings in the survey’s 24-year history, as an overwhleming majority of people said they expected a return to austerity to deal with the economic fallout from Covid-19.

The KBC Bank Ireland Consumer Sentiment Index jumped to 52.3 in May, representing a 9.7 point monthly increase. It was the largest month-on-month improvement since January 2015, but must be seen in the context of a record 34.7 point drop in April.

The survey found that 86 per cent of consumers expect the introduction of cutbacks in public spending and/or tax increases within the next two to three years. More than half of this group took the view that such measures are very likely.

KBC economist Austin Hughes warned that this perception by consumers could in itself lead to economic damage.

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“If Irish consumers take the view that tighter fiscal policy will come before long, the risk is that they will adopt a more cautious approach to spending, triggering an economic second wave that would restrain the pace of recovery,” he said.

Mr Hughes said the improvement in consumer sentiment in May largely reflected the Government’s announcement of a phased exit from lockdown measures, as well as some easing in adverse health outcomes and associated risks.

“It appears that these positive recent developments outweighed evidence of a sharp worsening of job market conditions of late, and a series of high-profile reports highlighting prospectively large and lasting economic and financial damage,” he said.

“The increase in the Consumer Sentiment Index in May is encouraging in that regard in that it suggests an overwhelming fatalism hasn’t taken hold that might make Irish consumers only responsive to negative news flow.”

Deep-rooted concerns

The number of consumers who expected the economy to weaken in the following 12 months came down from 90 per cent in April to 80 per cent in May.

“If the survey suggests the economy is now at or close to bottoming out, that is not to imply consumers expect any marked upswing any time soon,” said Mr Hughes. “Instead, even if we have moved beyond peak pessimism, concerns remain deep-rooted.”

Similarly, the proportion expecting unemployment to worsen through the coming year, at two out of three in May, was significantly down but not substantively different from the three out of four expressing this view in April.

“Our reading of the jobs element of the May results is that they simply suggest a widespread expectation of a lasting and severe weakening of job market conditions in tandem with protracted difficulties for the economy as a whole,” said Mr Hughes.

The only element of the May survey to post a weaker reading than April was consumers’ assessments of how their household finances had evolved through the previous 12 months.

“Given the traumatic and widely felt hit to incomes and asset values in recent months, the finding in May that just 3 per cent of consumers felt they were better off than 12 months ago while 39 per cent felt they were worse off is not entirely surprising,” said Mr Hughes.

“The sense that we may be at or near the low point of the current episode might be inferred from a marginal improvement in consumer thinking in relation to the outlook for their household finances.”

Numbers expecting a further deterioration in living standards dropped to about four in 10 from five in 10 in April.