By Conor Lambe, Chief Economist at Danske Bank

2017 marked a challenging year for consumers in the UK and Northern Ireland. Inflation increased above the Bank of England’s target and wage growth failed to keep up, putting household finances under pressure.

This morning, Danske Bank published its Northern Ireland Consumer Confidence Index for the fourth quarter of 2017. The analysis showed that consumer confidence fell sharply at the end of last year to its lowest level since the fourth quarter of 2013. Here are five key things that stand out from the analysis.

The overall index is based on how consumers feel about four things – their current financial position compared with a year ago, how they expect their financial position to change in the year ahead, their job security, and the amount they expect to spend on expensive items in the future.

In the last quarter of 2017, all four of these sub-indices fell. This shows that the fall in overall confidence levels was broad based with consumers not finding one area where they were feeling more optimistic.

As part of our survey, we also collect data on consumers’ future savings expectations. This doesn’t feed into the headline index, but it also fell at the end of last year. This fall suggests that consumers don’t feel that they will be in a strong enough financial position to save a lot in 2018.

2. Local political uncertainty negatively impacted confidence levels

The devolved institutions collapsed in January 2017 and Northern Ireland has now been without a government for over a year, despite repeated attempts to restore power sharing.

More than a third of the respondents to our survey said that political uncertainty and the lack of a Northern Ireland Executive had the largest negative impact on their confidence levels in 2017 Q4.

It is clear to see the frustrations of local people at the current political impasse, and it continues to pose a serious risk to the economy with policy decisions, such as setting a Budget, being postponed.

With talks between the political parties currently underway we all hope that, this time, a deal can be reached.

3. Brexit impacted some people positively and some people negatively

Brexit is a topic that has become increasingly divisive, with many people feeling it is a serious threat to the UK and Northern Ireland economies and others feeling it is a great opportunity.

This divide is clearly shown in our analysis. 10 per cent of respondents said that the UK Government’s longer-term Brexit objectives had the largest positive impact on their confidence levels, but 10 per cent of people also said that it had the largest negative impact on how confident they were feeling.

Only 8 per cent of consumers stated that progress during the Brexit negotiations in recent months was the biggest reason for optimism, but 11 per cent felt it was the main reason for their pessimism.

4. Low interest rates continued to have a positive effect

Despite the Bank of England’s Monetary Policy Committee raising interest rates back up to 0.5 per cent in November 2017, just under a fifth of people highlighted that low interest rates were having the largest positive impact on how confident they were feeling.

Compared to historical levels, interest rates remain relatively low. But the proportion of people highlighting interest rates as the factor having the most positive effect on them in the last quarter of 2017 was slightly lower than in the third quarter of the year.

Last week, the Bank of England signalled that more interest rate rises are on the way so it will be interesting to see how consumer sentiment around interest rates changes going forward.

5. The commercial environment remains challenging for consumer-focused businesses

The fall in consumer confidence at the end of last year could pose some challenges for businesses that deal predominantly with consumers, such as retail stores, restaurants, bars and providers of leisure activities.

We expect the rate of consumer spending growth in Northern Ireland to remain relatively modest in 2018, and while we are forecasting increases in the economic output of the consumer-focused sectors, businesses within these sectors will have to chase growth in a challenging environment.

The fall in the part of our index that examines consumers’ expectations around future spending on expensive items suggests that for businesses that sell things like furniture, cars and holidays, it may not be all plain sailing ahead.

In Northern Ireland, like the rest of the UK, household spending is a driving force of the economy. Consumers tend to spend more when they are feeling optimistic. So if consumers continue to feel less confident throughout the year, that will have an impact on how the Northern Ireland economy performs in 2018.

This article was published in the News Letter on 13th February 2018