Several news outlets report consumer sentiment in Ireland lifted slightly over the summer months[1, 2], mainly due, they say, to price drops because of the summer sales. Fair enough. What they don’t mention is the impact of an unchanged ECB interest rate on people’s mortgages, a fairly stable economic environment once one controls for rising oil prices (see the chart opposite for more details, just click through), and the implosion of the housing market, and the slashing of prices for goods in many areas of economic life.
(I’ll have another post tomorrow going through the wholesale price index numbers—the price of bread went up 14% this year!.)
None of the newspapers I’ve read download the report itself and take a look at the numbers, relying on copy and paste quotes from Dr Duffy and Mr Hughes from the ESRI website. The numbers, as they usually do, tell a more nuanced story.
Here’s the chart, compiled by Austin Hughes of IIB bank and David Duffy of the ESRI. It’s an index, and it shows, from left to right, a worsening of consumer sentiment over the year to date, followed by a decrease in the decrease, and then a slight uptick from 63 to 69. Click the figure to get the ESRI’s report in full.
More interesting is the figure buried in the text about consumers’ expectations about the next 12 months. What does the man in the street think? He thinks it’s going to get better. This measure, again an index, went up from 23 to 26. The dramatic decrease in consumers’ expectations over the year is shown in the figure below:
Again, what could account for the dramatic drop off in expectations, which are just opinions about the future, in the Irish economy? Well first, the slowdown in the housing market, second, rising oil prices, and third, high relative prices for almost every good in Irish commerce at the moment. The government will act to stabilise the housing market in the next budget, and perhaps before that, for political survival. The price of oil is dropping again, but won’t drop back to pre-2006 levels—the supply just is not there. The price of goods in Ireland is something only Irish consumers can effect: stop buying expensive stuff, but buy its cheaper variant. Retailers get the signal through increased inventories that people either want other stuff or cheaper stuff. They drop their prices to get rid of the stuff they have now, in a sale, which is what we saw over the summer. The prices of everyday commodities have to moderate to change people’s perceptions of the future, which is based mainly on how their incomes are coping with their consumption choices, so if people shop around more, and our retailers begin getting the point that lower prices correlates to stronger demand (ala Lidl), then we will be in pretty good shape.
The only person who can make a change like that is the Irish consumer—the government can’t make the spending choices for them. People will adjust in a year’s time, and as long as the US economy doesn’t physically implode, which no-one wants to see happen, things should stay more or less on course for a return to moderate growth in 2009/2010, as the ESRI predicts in its recent quarterly report.
