What are Irish consumers thinking? The latest KBC/ESRI consumer confidence index show some surprising improvements in consumer sentiment as we start 2009. The different components of the index give us some clue as to what is going on. There is one main sentiment index (the blue line in the chart), comprised from responses to five questions as follows (from the description of the methodology):
Q.1. How do you think the economic situation will develop over the next 12 months? (get better/stay the same/get worse)
Q.2. Do you think the number of people out of work in the country in the next 12 months will (increase/remain the same/decrease)?
Q.3. How does the financial situation of your household compare now with what it was 12 months ago? (got better/stayed the same/got worse)
Q.4. How do you think the financial position of your household will change over the next 12 months? (get better/stay the same/get worse)
Q.5. In view of the general economic situation at the present time, what do you think about people buying large items such as furniture, washing machines, TV sets etc. Do you think that for people in general the present time is (good/neither good nor bad/bad)?
There are two sub-indices: the red and green lines in the chart. Overall, Irish consumer confidence is still well below the historical trend since the series was created in February 1996. No surprise there. More interesting is the trend in the red line: the Index of Current Economic Conditions. This is composed from the answers to Q3 and Q5. Interestingly, this particular index has recovered strongly from its lowest point in July last year, and is nearly back to where it was a year ago (and on par with the levels recorded back in 2003).
The academic literature suggests that the current level of consumer sentiment may be a predictive indicator (pdf) of the short run outlook for incomes and the wider economy. But it will probably require all three indices to be turning upwards before we can assume recovery is on its way.