January saw consumer sentiment weakening again on the back of growing pessimism about the outlook for the economy and new worries about household spending power.
The KBC Ireland/ESRI consumer sentiment index fell to 49.6 in January from a reading of 50.2 in December. Despite the drop, the index is still showing a much stronger reading that the level of 39.6 seen last July.
KBC says the modest decline would have been more significant if a marked improvement in the buying climate had not occurred. This was due to the impact of heavy price discounting in post-Christmas sales and more reductions in interest rates.
Consumers were most worried about the outlook for the Irish economy as a whole. This element of the survey hit its lowest level in its 13 year history. 85% of respondents expect the economy here to deteriorate further in the next 12 months, while only another 6% expect to see an improvement.
KCB Ireland says the gloom reflects a torrent of bad economic news lately, including the prospect of cuts in government services and higher taxes. The announcement of major layoffs at Dell as well as another sharp rise in the unemployment levels point to the fact that 2009 will be a tougher year than 2008.
However, it also points out that the January data must be seen in the context of record lows in consumer confidence in the US, Japan and Iceland.
The bank says it is hardly surprising that people are becoming more worried about board economic prospects as it affects their assessment of their own financial situation.
Despite more ECB rate cuts and heavy discounting in the sales, consumers are aware that the increased likelihood of job losses represent the most obvious threat to household finances.
It says the trend in sentiment in the past couple of years suggest that consumers have been preparing themselves for tougher conditions for some time.
'While there is little doubt that the Government must restore order to Ireland's public finances, the January sentiment survey underlines the importance of striking the right balance in the policy response,' commented KBC Ireland's Austin Hughes.
'Failed efforts to turn around the budgetary position in the early 1980s teach a harsh lesson in this respect. The details of the survey warn that the cure must not doe more damage than the disease,' he cautions.
