Irish consumer mood weakens again in May

·?????? Consumer sentiment slips for the fourth month in a row

·?????? Cost of living concerns still hitting confidence

·?????? We interpret fall as signalling disappointment at lack of improvement rather than dramatically poorer conditions

·?????? Irish consumer worries not unique; US consumer sentiment tumbles to 6 month low in May

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·?????? Special question focusses on Irish consumers capacity to handle an unexpected financial expense costing €1,000.

o?? We categorise Irish consumers on their responses as ‘comfortable’, ‘coping’ or ‘clinging on’;

o?? Just over half of Irish consumers would draw on savings or income

o?? About one in four would borrow from a financial lender, family or friends

o?? Almost one in five couldn’t handle such an emergency or would have to sell something??

Summary

Irish consumer sentiment fell for the fourth month in a row in May as concerns around continuing pressure on living costs weighed on consumer thinking regarding household finances. While the rate of inflation has eased, a range of recent high profile increases in living costs appear to be prompting a renewed sense of ‘feel-bad’ among financially stretched and fragile Irish consumers.

The pull-back in consumer confidence in recent months is relatively modest and sentiment remains less negative than through 2023. If an easing in nervousness over the turn of the year seemed to reflect relief that economic and financial conditions would not be as bad as feared, there now appears to be growing disappointment that things are not improving nearly as far or as fast as Irish consumers had hoped.

It is unusual for Irish consumer sentiment to fall for four months in a row. We think the decline in sentiment through the past four months reflects a significant but not substantial change in consumer thinking.

Notwithstanding reasonably encouraging signs of economic growth and a sharp slowdown in inflation, most Irish consumers appear to need much stronger evidence of a broad-reaching improvement to be convinced that? the current trajectory of the economy and their household finances is positive rather than problematic.

Section I;?Consumers seem to be struggling more than they expected

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The Credit Union Consumer Sentiment Survey (in partnership for Core Research) shows an index reading of 65.7 for May, down modestly from the April figure of 67.8. The May reading marks the fourth monthly decline in a row.

There have only been five previous occasions in the 28-year history of the sentiment series in which confidence has weakened for four successive months.

The most recent was two years ago in the immediate aftermath of Russia’s invasion of Ukraine. Before that, it was in 2019, when a disorderly Brexit was threatened. There were also two periods of four month drops in sentiment during the financial crash and one prior to that in 2002 in the aftermath of the Dot-com collapse.

While we think the most recent drop in sentiment is significant and signals a disappointed and, in some instances, distressed Irish consumer struggling to make ends meet, we don’t think it suggests a substantial change in Irish economic and financial conditions in the way that similar periods of weakening sentiment reflected the risk of ‘regime-shift’ in the past.

It should be noted that the fall in consumer confidence from February to May followed four successive monthly increases between October and January. The 8.5-point cumulative decline in Irish consumer sentiment over the past four months reverses a little over half the 15.4-point gain in the index seen in the previous four months.

Previous four-month episodes of declining sentiment saw much larger declines towards survey low-points. The May sentiment reading of 65.7 remains slightly closer to the long-term survey average of 84.5 than the series low point of 39.6 (seen in July 2008), suggesting that Irish consumers are downbeat rather than despairing at present.

US consumers notably more miserable in May

Weaker consumer sentiment readings of late are not unique to Ireland. It is notable that the preliminary May consumer sentiment figure for the US saw a marked weakening. As the diagram below suggests, the broad trend in Irish and US consumer sentiment has been broadly comparable in recent years.

In terms of confidence, Irish consumers have responded more negatively than their US counterparts to the pandemic and the Russian invasion of Ukraine but more stubbornly entrenched inflation and the related prospect of higher interest rates for longer, together with increasing uncertainty ahead of the November US Presidential election, appear to have weighed heavily on the mood of consumers in the ‘States of late.

Again, we would suggest that as in the case of their Irish counterparts, consumers in the US seem to think that progress has been less marked and problems more lasting than had been expected some months ago.

Mixed May sentiment survey details suggest Irish consumers struggling to make sense of contradictory signals

The details of the May reading of the Credit Union Consumer Sentiment Survey (in partnership for Core Research) are mixed with three of the main elements of the sentiment index weaker than in April and two stronger.

Some sense that consumers are grappling with unclear economic and financial conditions is suggested by contrasting fortunes in the two ‘macro’ elements in the May survey.

Consumer thinking on the general economic outlook weakened modestly for the fourth successive month as new Department of Finance forecasts showed a modest but continuing downgrade to the outlook for domestic growth in coming years and new European Commission forecasts also pointed towards meagre growth prospects for the Euro Area economy. In a similar vein, domestic commentary continued to focus on downside risks to the ‘Tech’ sector. ???

In contrast, consumers were less negative on job prospects in May than in April when sentiment in this regard weakened sharply on a wide range of high-profile layoff announcements. A relatively quiet May survey period in terms of job news may have eased some of the concerns that emerged in April.

As a result, a notable uptick in official unemployment data for April doesn’t seem to have resonated with Irish consumers. Although Payroll data for March were released after the May sentiment survey concluded, the continuing increase in numbers at work reported in that release seems consistent with the survey results in suggesting the Irish jobs market may be a touch slower but is still reasonably solid. ???

The weakest elements of the May data for the Credit Union Consumer Sentiment Survey (in partnership for Core Research) were those focussed on household finances. In contrast to the April reading, Consumers were more downbeat on how their household finances had evolved over the past twelve months. ?There was also a clear deterioration in household thinking on the outlook for their household finances in the next twelve months.

We think there could be several reasons for this. First of all, while inflation data for April show a further easing, there were significant month-on-month price increases in key areas such as food, drink and clothing prices. In addition, (excluding volatile airfares and package holiday costs) the annualised increase in consumer prices over the past three months is running at around 5%, a notably hotter pace than the 2.6% year-on-year headline figure for April.

Although most consumers are unlikely to plough through the details of the official inflation data, they are likely to be sensitive to persistent and painful increases in living costs. In addition, beyond a wide range of price increases signalled in April, the latest data showed continuing large increases in rents while mortgage rates climbed to a six-year high. Furthermore, a range of commentary suggested future interest rate reductions could be smaller and slower to materialise than previously thought.

Our sense is that rising energy costs played a significant role in weaker sentiment in May. The latest survey period saw a further increase in Carbon taxes which coincided with motor fuel prices increasing to their highest level in six months.? As the diagram below illustrates, movements in energy prices have tended to prompt movements in consumer sentiment in the opposite direction since the cost-of-living crisis began to bite.

In spite of the tentative easing in energy costs since last autumn, it seems that even modest upticks can have outsized impacts on already strained household finances and, consequently, on consumer sentiment, possibly because this suggests that household finances could worsen rather than improve as had been hoped. ?

Perhaps surprisingly and encouragingly, the second element of the sentiment survey to post a month-on-month gain in May was in relation to the buying climate. This may well reflect seasonal spending commitments ahead of the holiday season (and a somewhat softer trend in travel costs of late).

We continue to see this element and the broader sentiment survey pointing towards a contained increase in overall consumer spending through 2024 rather than a slump or surge at either extreme.

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Section II; Irish consumers comfortable, coping or just clinging on?

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The May Credit Union Consumer Sentiment Survey (in partnership for Core Research) contained an additional question focussed on Irish households’ capacity to weather a financial emergency, as we have done for the past four years.?This is based on a similar question asked in the regular ‘Report on the Economic Well-Being of U.S. households’?conducted?each year by the US Federal Reserve.

The responses given by Irish consumers to the question ‘How would your household deal with an unexpected financial emergency costing €1000?’?are shown in the diagram below for the May 2024 sentiment survey alongside the responses given in the previous four years.

As can be seen from the diagram, the most common response of Irish consumers to an unexpected financial emergency is, as it was in previous years, to dip into household savings. In the 2024 survey Some 39% of consumers say they would use savings to cope with an unforeseen €1,000 bill.

The 2024 result showing 39% of consumers drawing on savings is the lowest proportion in the five years in which this question was asked and represents a significant and continuing fall in the proportion of consumers accessing savings from a peak of 49% in 2021. This likely reflects the shift from circumstances of temporary pandemic-boosted savings levels in 2021 to a cost-of-living depleted level at present.?

Not surprisingly, drawing on savings tended to be positively associated with higher incomes and not having difficulty making ends meet at present. Male respondents also tended to give this answer more frequently than females (again possibly reflecting income differentials). The demographic least likely to give this response were those in the 45-54 age group, perhaps reflecting significant financial commitments while those aged over 65 were more likely to give this response, perhaps because of lifetime savings. Those aged 25-34 were also more likely to say they would draw on savings, possibly hinting at a later incidence of home ownership and other financial pre-commitments.

Broadly consistent with the results of previous years, the 2024 survey found that some 15% of Irish consumers say they would meet an unexpected bill of €1,000 from their current income. Again, as might be expected, these responses were strongly correlated with higher incomes and not having difficulty making ends meet. Males were also more likely to give this response than females. This response was least commonly given by those aged 35-44 and, perhaps surprisingly, was most common among those aged over 65, suggesting that financial circumstances can differ very widely in later life. ?

While the ability to draw on savings or income to meet unexpected financial emergency suggests significant financial capacity among many Irish consumers, the survey also suggests significant shortfalls for others.? At the weaker end of the financial spectrum, some 15% of Irish consumers say they would be unable to cope with a financial emergency costing €1,000.??

As the diagram illustrates, the 2024 survey result showing 15% of consumers unable to cope with an unexpected bill of €1,000 represents a very slight (if statistically insignificant) improvement on the 2023 figure of 17% but a clear deterioration on the roughly 10% average of the three previous years.

At the margin, income gains and fiscal support measures may have limited the share of Irish consumers unable to cope with unexpected financial difficulties but the survey suggests the continuing strains caused by the cost-of-living crisis has meant a significant increase in numbers who are constantly close to the brink financially. It should also be noted that we have held the monetary amount of the financial emergency constant at €1,000 for the past five years. If we had indexed the cost to Irish inflation, it would be set at just under €1200 for 2024.

Not surprisingly, an inability to cope with a financial emergency was strongly negatively correlated with income and with ability to make ends meet at present. This response was more prevalent among females than males and also more commonly given by those aged between 45 and 64. In contrast, those aged over 65 were notably less likely to give this response.

As the diagram above illustrates, the 2024 results show some increase in Irish consumers propensity to borrow from a range of financial lenders in response to a financial emergency.

While the proportion of consumers borrowing from credit unions, banks and by credit card were all slightly higher than in 2024, the resort to other financial lenders increased more notably, albeit to a still limited number. It might be speculated that the demographic make-up of this group, concentrated in those having difficulty making ends meet and those with lower incomes, may be driving some consumers towards easier if more expensive forms of credit.

In broad terms, the results of the 2024 survey on Irish consumers capacity to cope with a financial emergency suggests a three-tier structure among Irish consumers at present; just over half of Irish consumers might be deemed ‘comfortable’ as they could handle a financial emergency by drawing on savings (39%) or income (15%).

About one in four consumers might be described as ‘coping’ in that they could deal with a financial emergency by borrowing from a variety of sources including both financial lenders and family and friends.

At the margin, some of these borrowers might more readily be classified as part of a third group; those ‘clinging on’. This group, that might amount to nearly one in five Irish consumers, includes those who say they couldn’t handle an unexpected bill of €1,000 (15%), those who say they would sell something (3%) and probably some element of those borrowing from sources other than a bank or credit union.

The Credit Union Irish Consumer Sentiment Survey is a monthly survey of a nationally representative sample of 1,000 adults. Since May 2019, Core Research have undertaken the survey administration and data collection for the Survey.?The survey was live between the 3rd-13th May 2024.