Irish consumer sentiment falls sharply in May

Confidence in the economy nosedived last month, falling back to its lowest reading since last November.

The latest KBC Bank Ireland/ESRI Consumer Sentiment Index fell to 79.4 in May, having jumped to a seven-year high of 87.2 the month before. In addition, the three-month moving average fell for the first time in over a year, to 83.2 from 85.3 in April.

KBC's chief economist Austin Hughes said the scale of the decline was surprising.

“In the context of widely held expectations of a marked improvement in the fortunes of the domestic Irish economy through 2014 this would represent something of a setback,” he said.

Mr Hughes said there were a number of possible explanations that might account for the weakening in sentiment, including a re-assessment of people's financial circumstances on the back of the local and European elections.

“Our sense is an intense if understandable focus on the difficulties still facing the Irish economy in the lead-up to the end of May elections led consumers to downgrade their assessment of their current circumstances. Continuing controversies regarding the introduction of household water charges and access to medical cards may also have contributed. As a result, pressures on personal finances, which have been repeatedly signalled in recent sentiment readings, may have been seen as a deeper and longer lasting problem,” he said.

He added that technical factors - such as a statistical ‘blip’ - might also be behind the decline in confidence.

“The size of the drop in the May sentiment reading may be signalling a substantive change in the mood of Irish consumers but it could also reflect a tendency for data sets to throw up extreme outliers periodically that are largely statistical ‘noise’ rather than indicators of dramatically changed circumstances,” he said.

“We will need to see another couple of months’ data before we can definitely conclude as to whether the May results were simply the result of the random variability inherent in these sorts of data,” he added.

The Consumer Sentiment Index comprises two sub-indices; an index of consumer expectation that focuses on how consumers view prospects over the next 12 months and an index of current economic conditions, focusing on consumers’ present situation

All five components of the Consumer Sentiment Index declined in May, the first time this has happened in sixteen months.

The largest declines were in those elements of the survey relating to household finances. The number of consumers that expect their personal finances to worsen in the next twelve months climbed from 33 per cent of respondents in April to 46 per cent last month while the number expecting an improvement was unchanged at 17 per cent.