Consumers started the New Year with a brighter disposition as apocalyptic fears of an imminent euro break-up faded, new data suggests.

According to KBC Bank Ireland, reduced concerns about the impact of Budget 2012 also helped to drive sentiment higher in the opening month of the year.

The KBC Bank Ireland/ESRI consumer sentiment index clawed back two-thirds of the sharp decline recorded between November and December. The measure bounced to 56.6 in January from 49.2 in December.

Cormac O’Sullivan of the ESRI said consumers are less gloomy and believe that now is a good time to make large purchases despite the January VAT increase. However he noted that the index has been exceptionally volatile in recent months as consumers continuously adjust their expectations in the face of uncertainty.

Austin Hughes of KBC warned that the improvement in sentiment in January did not alter the picture of an Irish consumer who is "nervous and cash constrained", but it does indicate that the intense fears seen in December have eased somewhat.

“The threat of an imminent euro break-up has faded and Irish consumers may also be a little less frightened about the impact of Budget 2012 on their household spending power,” Mr Hughes said.

"Encouragingly, all the main elements of the consumer sentiment survey improved in January even if the gains were relatively modest," he said.

He explained that a bounce in response to price discounting in post-Christmas sales accounted for about one-third of the improvement in the index reading, but noted that the sales effect was somewhat less pronounced than in previous years. “This suggests that an uncertain outlook and a continuing squeeze on household finances are keeping Irish consumer spending under downward pressure," he said.

The January reading of 56.6 is in line with last year’s average of 55.8 but remains well off the survey’s long-term average of 87.6.