Why the mood of our households matters
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IT'S good news, but let's not get carried away. Irish consumers are still downbeat about the economic outlook, fearful for their own jobs and straining just to make ends meet each month. But -- and it's an important but -- they did feel a little less gloomy about the world at large in August.
It is hardly surprising that Irish consumers have felt miserable of late. Indeed, household confidence has been on a weakening trend since early 2006. At first it was bad news, in the shape of rapidly rising interest rates, that did the damage.
An imploding housing market increased the gloom and, more recently, a barrage of bad news on the jobs front, coupled with sharply rising food and fuel prices took a heavy toll. In such circumstances, does it really matter how consumers feel?
The mood of consumers matters for several reasons. First of all, the fact that sentiment has been sliding gives lie to the cartoon view of the Irish consumer on a free-spending binge financed by reckless borrowing. The far less colourful reality is that most Irish households have been adjusting their outlook and their spending habits for some considerable time. Painful though this may be, it puts them in a better position to weather the current economic storm.
So, let's look at the reasons for the pick-up in consumer confidence in August and consider whether this suggests some light at the end of a very dark tunnel.
Encouragingly, the brightening in the mood of Irish households was broadly based.
The sharpest gains were in the buying climate, as bargain hunters took advantage of reportedly large price cuts in the summer sales.
This hints that retail sales for the July/August period may be somewhat better than the awful numbers seen of late.
Irish consumers were also slightly less worried about the general economic outlook in August. A sharp fall in oil prices and less threatening noises from the European Central Bank on interest rates were the likely drivers of what is a relatively modest upgrade.
The same factors led consumers to be slightly more optimistic as to how their household finances might evolve. Higher energy costs and rising monthly loan repayments had a very negative impact on the Irish economy in the past year or two.
So, even the prospect of some small relief brightened the outlook of consumers.
It is far too early to suggest that the improved August mood signals a decisive turnaround in sentiment or in broader economic prospects. Consumers remain extremely and understandably nervous about the threat of job loss, and the news flow on unemployment is likely to get worse before it gets better; but the improvement in consumer sentiment in August could still be important for a couple of reasons.
First of all, the rise in confidence suggests Irish consumers haven't completely thrown in the towel.
Indeed, in view of the gloom-laden news through the first half of 2008, it may be surprising as well as reassuring that consumers are still capable of recognising favourable developments and teasing out positive implications for the economy and themselves.
Austin Hughes is chief economist with IIB
