Confident Forecasts for Spending

Just how influential is consumer confidence on consumer spending? We've run a simple linear regression analysis of the year-on-year growth in Irish consumer spending (seasonally adjusted) and the consumer sentiment index.

The chart shows a plot of the two factors for each quarterly period since Q1 1998 through to Q1 2009. Growth on the vertical axis, confidence on the horizontal axis.

It is fairly obvious that the two are strongly correlated: with a coefficient of 0.81 to be precise. Indeed if we regress confidence as our explanatory variable against spending as our dependent variable then nearly two thirds of the variation in the latter can be explained by changes in confidence levels since 1998.

For the more visually minded, the current ESRI/KBC consumer sentiment index stands at 48.7 in August. Mapping this on the red line implies consumer spending growth of close to zero. Could be worse - but let's hope it gets better soon.