Politics, inflation and Brexit are the main reasons behind the fall in consumer confidence

By Conor Lambe, Economist at Danske Bank

In the third quarter of 2017, consumer confidence in Northern Ireland fell again. The Danske Bank Northern Ireland Consumer Confidence Index fell by two points in July, and by a further four points in 2017 Q3, to a value of 135. It was also two points lower than it was in the third quarter of 2016, just after the EU referendum.

Compared with July of this year, there were decreases across the four sub-indices that make up the overall index. This suggests that consumers are feeling less optimistic about both their current and future financial positions. People are a bit more pessimistic about their job security – this was the first time that this particular part of the index had fallen since the third quarter of last year. And consumers are also feeling less confident with regards to the amount they expect to spend on high value items, such as furniture and holidays, over the next twelve months.

So, what are the factors influencing consumer confidence? As part of our survey, we asked consumers to select the factor having the largest positive impact on their confidence levels and to select the factor having the largest negative impact on their confidence levels.

There are a number of things that are having a positive impact on confidence. For example, 22 per cent of people cited low interest rates as having the largest positive bearing on how confident they felt in the third quarter of the year. Low interest rates mean that personal loan and mortgage repayments are less of a burden on household budgets.

However, given recent statements from the Bank of England’s Monetary Policy Committee, it appears as if interest rates are likely to rise quite soon. The pace of interest rate rises is expected to be very gradual, so compared to historic norms, interest rates are expected to remain relatively accommodative for a period of time even once they start going up. In the quarters ahead, it will be interesting to see whether consumers react more to the fact that interest rates remain low compared to what they have been in the past, or to them increasing for the first time since 2007.

Some consumers also cited rising house prices, while a small number of people mentioned the resilience of the local labour market as key factors making them feel more confident. But around a third of respondents said they didn’t know what was having the largest positive impact on their confidence levels.

Perhaps unsurprisingly, some people cited Brexit as something making them feel better, while others said it was making them feel worse. To be more precise, twelve per cent of all the people we surveyed said that the UK Government’s longer-term Brexit objectives had the largest positive impact on their confidence levels, while seven per cent felt the same way about the progress made during the Brexit negotiations in recent months.

But on the other side of this, nine percent of those surveyed stated that the Government’s longer-term objectives linked to leaving the EU had the largest negative impact on their confidence levels, while ten per cent felt less confident due to the progress of the Brexit negotiations over the last few months.

Given that confidence fell in the third quarter of the year, it would appear that the reasons for consumers feeling pessimistic are outweighing the reasons for optimism. As well as Brexit, there are a number of other factors having negative implications for consumer sentiment. For some people, it is global risks such as the relationship between the western world and North Korea, terrorism and cybercrime. For a larger number of people, it’s the impact that high inflation is having on their household finances. But the standout reason that people cited as having the largest negative impact on confidence was political uncertainty and the lack of a Northern Ireland Executive. Thirty-six per cent of the people we surveyed selected this response – a point which serves to reinforce the need to see the return of the Executive as soon as possible.

Earlier this month, when we published the latest Danske Bank Northern Ireland Quarterly Sectoral Forecasts report, we projected a slowdown in economic growth in Northern Ireland. Given the extent to which consumer spending drives the local economy, this fall in confidence reinforces that view.

This article was published in the News Letter on 31st October 2017.

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