Increase in confidence doesn’t mean consumer squeeze will be avoided

By Conor Lambe, Economist at Danske Bank

It was not surprising that consumer confidence in Northern Ireland took a hit after the EU referendum, as it did in the rest of the UK. The Danske Bank Northern Ireland Consumer Confidence Index indicated that confidence fell slightly in both the third and fourth quarters of 2016.

The depreciation in sterling that followed the Brexit vote was always likely to lead to higher inflation, which would dampen real wage growth and exert downward pressure on households’ purchasing power. As a result, consumer spending growth was projected to slow in 2017 and the most recent data shows that this appears to be what is happening.

Inflation has increased and is now above the Bank of England’s target, real wage growth is close to zero and some consumer focused sectors of the economy, such as retail trade and accommodation, made a negative contribution to UK economic growth in the first quarter of 2017.

However, despite the challenges being faced by households across the UK, consumer confidence in Northern Ireland bounced back strongly in the first quarter of 2017. Danske Bank’s Consumer Confidence Index increased by nine points between the fourth quarter of 2016 and the first quarter of this year and the Index was also four points higher compared with the first quarter of 2016.

Given the burden that higher inflation will continue to place on households, it was surprising to see such a big increase in consumer confidence at the start of this year. But I can think of a few reasons which might explain why consumers are feeling more optimistic.

At the beginning of the year, the Prime Minister set out what the UK Government are hoping to achieve during the Brexit negotiations, giving consumers some more clarity around what the UK’s future relationship with Europe might look like.

UK and EU officials have also recognised that Brexit could have implications for the border between Northern Ireland and the Republic of Ireland. But both sides have shown willingness to try and find a solution that keeps disruption to a minimum.

And, despite the challenges that the Brexit negotiations will bring, consumers may now feel reassured that the sharp, short-term economic downturn that had been anticipated in the event of a vote for Brexit is unlikely to come to pass. Economic growth is still projected to slow due to the impact of inflation on consumer spending and as Brexit-related uncertainty dampens business investment, but the Northern Ireland economy is expected to keep growing over the next few years.

The Consumer Confidence Index provides an overall estimate of how optimistic, or pessimistic, consumers are feeling. But delving into the details of the survey also reveals some interesting observations.

Over the quarter there was an improvement in the part of the index that examines households’ opinions of how their current financial positon compares to a year ago. In the first quarter of this year, 17 per cent of respondents felt they were better off than a year ago but 17 per cent also thought they were worse off. This shows that some consumers are feeling a squeeze, but it does represent an improvement on the end of last year when 13 per cent of consumers felt they were better off while 19 per cent felt worse off.

There was also a relatively strong rise over the quarter on households’ expectations of how their financial position will change over the next 12 months. This reversed the sharp drop observed on this part of the index in the fourth quarter of 2016.

Consumer sentiment around job security was unchanged compared to the end of 2016, but improved a little compared to the same time last year. More than three quarters, or 77 per cent, of respondents to our survey said that they expected job security to stay the same. This suggests consumers are not expecting a severe and prolonged downturn in the local labour market.

One area in which we observed a large rise both over the quarter and the year was household expectations of the amount they intend to spend on high value items like furniture, holidays or home improvements. This increased by 13 points compared with 2016 Q4 and 14 points compared with 2016 Q1.

It is good to see consumers in Northern Ireland feeling more confident, however this doesn’t mean that the squeeze on consumer spending is going to be avoided. Our survey shows that the same proportion of people currently feel worse off compared with last year as feel better off. And while expectations around households’ future financial position did pick up, in level terms the index is just back to where it was in the second and third quarters of 2016.

There is some cause for optimism from the responses around future spending plans on high value items. The sharp rise on this measure more than offset the fall in the fourth quarter of 2016 and this suggests that a rise in consumer spending this year is likely. But despite this, I still expect overall consumer spending growth in Northern Ireland to slow as we move through 2017.

This article was published in The Irish News on 16th May 2017.​​​

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