Unsurprisingly, the KBC Bank consumer sentiment index for April has recorded the most severe decline in the survey’s 24-year history, falling from 77.3 in March to 42.6 this month.

That 42.6 is not the lowest point ever — that was in July 2008 when it hit 39.6. But according to KBC “the scale of change recorded between March and April might be expected with a frequency of around every couple of hundred years”.

“The April reading suggests a sea-change in Irish consumers’ thinking about their economic circumstances in response to the coronavirus,” commented chief economist at the bank Austin Hughes (pictured).

Interestingly, the decline is much sharper by orders of magnitude than that in the US, with the CSI dropped  18.1 points month-on-month. 

According to Hughes: “The larger decline in the Irish survey may owe something to a greater consistency of thinking in Ireland as to the nature and extent of the current crisis that may have encouraged a broader awareness of related economic risks. 

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“Arguably of greater importance is the likelihood that many Irish consumers still carry notably greater ‘scarring’ from the recent financial crisis than their American counterparts reflecting the greater length and depth of the crisis on this side of the Atlantic.”

In addition, the US policy response has exceeded that in Europe. The government has already enacted a fiscal stimulus of around 10% of GDP and a further stimulus  of between 5 and 10% of GDP is possible. The Federal Reserve has cut policy rates aggressively, expanded its balance sheet more aggressively than the ECB, and initiated a wide range of special support schemes.

Hughes also points to the fear factor influencing the spending decisions of Irish households, amplified markedly by any suggestions that recovery from the coronavirus would prompt a return to austerity. "Signalling forcefully that this would not be the case must be a key element in any policy focussed on an economic turnaround,” Hughes added

Given the existing weakness of consumer sentiment, powered by Brexit and other factors, Hughes adds that the positive expectations element which restrained the decline has now vanished. “Now a much weaker reality and further downside risks are feeding off each other, and underline the importance of policy action to break a threatened vicious circle.”

Nine out ten consumers  envisage weaker conditions through the next 12 months, while three out of four see higher unemployment over that same period. Only one in 20 see their financial circumstances on an improving trend at present, compared to one in five at the start of the year, and one in two expect a further weakening over the next 12 months.

KBC concludes that  consumer sentiment and spending are unlikely to return to healthier trajectories without a substantial policy stimulus. According to Hughes, the capacity of Irish consumer spending to move back to a positive path may  depend critically on the scale, scope and speed of policy actions to re-start economic activity and employment growth.  

he added: “Such actions need to be sufficiently strong in terms of signal as well as size and speed if they are to credibly boost confidence and thereby avoid or at least minimise any permanent losses to the Irish economy from Covid-19.”

The full survey and analysis are available here.