By Conor Lambe, Economist at Danske Bank 

Over the first seven months of 2017, the UK and Northern Ireland economies have both experienced a slowdown. Consumer spending is the main driver of the local and national economy and the behaviour of households has been a major factor behind this more subdued economic performance. Given this, consumer sentiment is a key consideration when assessing the outlook for the economy over the rest of this year and next year. So how confident are consumers feeling?

The Danske Bank Northern Ireland Consumer Confidence Index suggests that consumers are feeling less confident than they did earlier this year. The index decreased by two points from 141 in the first quarter of the year to 139 in July 2017.

The main driver of this fall in confidence is likely to be the consumer squeeze that has taken hold in the UK and in Northern Ireland. Prices are rising faster than wages and this is eroding consumers’ purchasing power. With household finances under pressure, a drop in confidence levels is understandable.

Brexit-related uncertainty, which seems to have increased since the general election, could be another factor that has contributed to this fall in confidence.

Also, the lack of an Executive at Stormont is delaying the introduction of a Budget and, if it continues to drag on, will hold up policy measures such as finalising, and beginning to implement, the Industrial Strategy. This political impasse is another potential factor behind the drop in consumer confidence.

So, we know that the overall confidence level is lower, but looking at the components of the index can help us to understand more about how consumers are actually feeling.

The part of the index that examines how consumers feel about their current financial position compared with a year earlier fell in July compared with the first quarter of the year. This can likely be explained by the fact that inflation is significantly higher than it was a year ago so consumers are currently having to deal with a faster pace of price rises.

There was also a fall compared to earlier in the year with regards to households’ expectations of how their financial position will change over the next twelve months. Above-target inflation is projected to be a feature for some time. Therefore, the squeeze on households is likely to continue and people appear to be building this into their expectations.

The part of the index relating to consumers’ expectations of the amount they will spend on high value items, such as furniture and holidays, over the next twelve months was unchanged compared with the first quarter of the year. However, the part of the survey that examines households’ expectations of how much they will save in the next year experienced a fall of seven points in July 2017.

This is all fairly downbeat, but one encouraging finding from the survey was that consumers’ expectations around job security increased in July. The majority of consumers don’t expect their job security to change. But of those expecting a change, a greater number of people expect to become more secure in their job than expect their job to become less secure.

In conclusion, the depreciation of sterling following the EU referendum last year has led to inflation running at above the Bank of England’s two per cent target. This high inflation has contributed to falling real wages and a squeeze on consumers in Northern Ireland and in the rest of the UK. The fall in confidence shown by our survey reinforces the fact that households are feeling the pinch, and I expect the consumer squeeze to continue contributing to lower economic growth over the remainder of this year and in 2018.

This article was published in the News Letter on 8th August 2017.