Surprising consumer sentiment recovery despite cost of living worries

Irish consumer sentiment made a “surprising” recovery in June after four months of decline triggered by the cost of living anxieties.

The latest KBC Bank Ireland index rose to 57.7 last month from 55.5 in May but “it is not entirely clear why”, said the bank’s chief economist Austin Hughes. One possible interpretation of the data, said Mr Hughes, is that Irish households feel they are now “braced for the difficulties that lie ahead”.

“At current levels,” Mr Hughes said, “sentiment is awful rather than apocalyptic, suggesting the Irish consumer is down but not entirely out”.

With household costs sharply higher across the board in the early part of 2022 — turbocharged by the war in Ukraine, which has pushed global energy prices to around record levels — Irish consumers have continued to add to an “already large savings war chest” throughout the year, Mr Hughes said.

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“In such circumstances, it could be that the onset of summer sales and holiday spending prompted a slightly less pessimistic assessment of their financial circumstances by Irish consumers,” he said.

That said, just 5 per cent of consumers surveyed in June by KBC Bank felt that they did not need to make any adjustments to deal with the rising cost of living. Some 59 per cent of respondents, meanwhile, said they had already cut back on non-essential spending.

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Shopping around for better deals on essential items such as food and utilities is also becoming prevalent, the survey suggests. Cited by 40 per cent of consumers, switching to cheaper ‘own brand’ products in supermarkets was the most common cost-cutting action. Switching service providers, cited by 27 per cent of consumers and switching supermarkets altogether, cited by 20 per cent of consumers, were also relatively common.

The “small improvement” in consumer confidence may also have to do with indications from the Government that “supportive” measures will be rolled out in Budget 2023, against the backdrop of soaring inflation and worsening global economic forecasts.

However, Mr Hughes said: “Different interpretations of these data might imply markedly different paths for the Irish economy and, as a result, would suggest materially different policy actions.” The results suggest that Irish economic circumstances are “still evolving” and remain “unclear”, he said, which would “strengthen the case for waiting to calibrate major policy measures” rather than “rushing to action”.