Gloomy job forecasts and concerns about falling house prices have made consumers more pessimistic about the economy and their personal financial situation than they have been in almost four years.
Fears of layoffs in the construction sector and a general economic slowdown sent consumer sentiment tumbling in July to its lowest level since October 2003, according to the latest index by IIB Bank and the Economic and Social Research Institute (ESRI).
The consumer sentiment index fell to a figure of 74.7 in July, down from a reading of 83.2 in June, showing that consumers have become more negative about their current financial situation and view of the economic climate as well as their expectations for the next 12 months.
The monthly drop in consumer sentiment was the biggest since September 2005, when high-profile job losses prompted an economic "feel-bad" factor among consumers.
Although there wasn't a spate of layoffs in July, about 68 per cent of consumers indicated that they expected unemployment to increase in the next 12 months - the highest proportion to think so since October 2003.
"The mood of consumers seems to have been shaped by several high-profile forecasts, encompassing a notable weakening in economic growth and the risk of widespread job losses in the construction sector," said IIB Bank chief economist, Austin Hughes.
The index, which is compiled from more than 800 telephone interviews with consumers, also fell in June after the general election failed to inspire economic optimism among consumers.
But although Irish consumers are braced for testing economic conditions in the coming year, the fall in sentiment does not signal that a slump is imminent, Mr Hughes said.
While the Irish economy may have failed to live up to earlier "frothy" expectations, it may be equally difficult for it to "live down" some of the more pessimistic forecasts now circulating.
The Central Bank still expects the economy to grow by 5 per cent this year and 4 per cent next year.
However, some economists say higher growth is likely, and others are predicting that job losses in the housing sector will result in a slowdown in the economy.
Mr Hughes said consumers were more upbeat about their own household finances over the coming 12 months than they were about the economy in general, suggesting that they would continue to spend money.
Falls in consumer sentiment over the first half of 2007 coincided with a 7.5 per cent increase in retail spending, he noted.
"While consumers are increasingly cautious, their spending should remain reasonably healthy, albeit more restrained than in the first half of 2007."
