Food prices a blow for spending mood

RISING food and oil prices internationally are seriously undermining consumer sentiment.

Such concerns could result in an extended period of economic gloom as the US and Europe suffers from the backlash of sharply falling consumer spending, said Fortis Investments’ managing director and chief investment strategist, William De Vijlder.

His warning of protracted slow growth followed yesterday’s shock analysis from the Economic and Social Research Institute that Irish economic output would be 0.5% less than last year’s output level, effectively pushing the economy into recession.

De Vijlder thought the shift in sentiment a bit dramatic given the ESRI’s earlier forecast of 1.8% growth made in its March bulletin.

Whatever the final outcome, De Vijlder said the emerging reality across Europe and in the US was that the sharp spike in food and oil prices is seriously undermining consumer confidence.

That is starting to impact countries such as Germany which until recently continued to show reasonable growth, relatively speaking.

Because of the dip in consumer confidence he says the set backs that started to afflict Ireland and the southern European economies like Spain and Italy is now starting to be felt all over the continent and could result in a prolonged period of very low growth for all economies, not just Ireland.

Meanwhile Dermot O’Leary, senior economist at Goodbody Stockbrokers, believes the ESRI is right about the recession.

“To be fair we cannot disagree with the view that Ireland will go into recession this year,” he said in a note to the market yesterday.

While the forecasts for this year and next are “vastly different” to the ones released in March, a point also made by De Vijlder, O’Leary thinks the Government think-tank has called it right, despite the sharp revision from its earlier forecasts of reasonable growth for this year and next.

In his assessment O’Leary believes the economy will move into negative territory at the end of this year and remain there in the first quarter of 2009.

More information was needed on the performance of traded services and consumer spending in the first quarter of the year before the full extent of the slow down can be fully gauged, he said.

That said, he expects the data will reveal that the economy did actually contract on an annual basis at the start of the year.

“It can be accepted that the domestic economy is in recession,” he said.