Financial crisis and Budget fears hit consumer confidence

Consumer sentiment weakened in October due to turbulence in the global financial markets and concerns at the measures to be included in the Budget.

The consumer sentiment index compiled by KBC Bank and the Economic and Social Research Institute (ESRI) declined from 45 in September to 42 last month.

Given the negative economic news last month the authors suggest the fall in consumer sentiment was smaller than might have been expected, describing it as "relatively modest" when compared to sentiment declined in other countries.

The report noted that the closely watched University of Michigan measure of US consumer sentiment fell from 70.3 to 57.6, the largest monthly drop since that survey began in 1952.

However, a sharp fall in oil prices last month and an interest rate cut has eased some of the pressure on consumers.

The index, compiled from a survey of 960 people during the first two weeks of October, remains slightly above the record low of 39.6 recorded in July and follows two months of improvement.

Austin Hughes, chief economist at KBC said the "comparatively modest deterioration" in Irish consumer sentiment could be attributed the fact that Irish consumers have been bracing themselves for tough economic conditions for some time.

He noted that two-thirds of the consumer responses were taken before October 8th, prior to the Budget and the announcement of the co-ordinated interest rate cut by the European Central Bank (ECB) and other central banks.

While the deterioration in the international financial system and the prospect of a difficult budget weighed on Irish consumers last month "the shock appears to have been a good deal more severe for consumers in many other countries who are only now adjusting to the prospect of markedly poorer economic and financial conditions," Mr Hughes said.

With the ECB expected to cut rates again later this week Mr Hughes noted the importance of interest rates to Irish consumers due to the high levels of property ownership in the State. "The build-up in household debt in recent years has made sentiment and spending particularly sensitive to changes in borrowing costs."

"Indeed, the beginning of the current declining trend in Irish consumer sentiment can be traced back to the beginning of 2006 when a long and painful sequence of interest rate increases began," he said.

He said higher mortgage repayments has drained almost €6 billion from Irish household spending power between 2005 and 2008.

Mr Hughes anticipates another fall in sentiment next month but noted the October data indicated that a combination of lower fuel and energy bills and declining borrowing costs may be offering consumers some respite.

David Duffy, economist with the Esri said the index reading of 42 for October contrasts with a reading of 71.8 in the same month last year.