Wednesday, January 28, 2009

Confidence Tricked?

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.


  1. Good post gerard - I cant think of any reason why the index of economic conditions has picked up to this extent - it looks like a jump from about 60 to 80 and that a freefall has been reversed.

    you could probably invent some psychological mechanism like "the worst has happened and it wasnt as bad as I thought it would be" but in general its hard to see what cues people are responding to that are making them more optimistic than before christmas about the economy.

  2. Agreed Liam - it's hard to explain, but curiously enough the same thing is happening in Germany: their explanation is that it's down to falling prices convincing consumers now's a good time to buy ...

  3. I agree with Gerard. Small credit items (credit union/savings/credit card)are good value if you are a savvy consumer. Cars are cheap (second hand), white goods are cheap (uk/norniron)so it is a good time to purchase. The Irish high street will suffer - as Eddie Hobbs said on RTE radio 1 yesterday 'the tiger premium of 25% on prices has got to go' - or words to that effect! And don't forget people will still 'rocket purchase' - live like a church mouse all week dining out of Lidl and then treat themselves to a luxury purchase (food/travel/goods) at the end of the week/month. the brain will delete all the Lidl meals for the memory of the medium rare fillet with a bottle of Gigondas!


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