Irish consumer sentiment surges to near 5-year high

DUBLIN Aug 28 (Reuters) - Irish consumer sentiment surged in August to its highest level since before the country's financial crisis as shoppers became more comfortable about their own finances and less gloomy on the economy's prospects, a survey showed on Tuesday.

While data last week showed that sentiment among Europe's consumers continued to sour in August, confidence in Ireland, which returned to long-term bond markets last month, rose for the seventh time in eight months.

The rise in confidence was tempered though by separate data on Tuesday showing Irish retail sales continued to fall in July, although at a slower pace.

The KBC Ireland/ESRI Consumer Sentiment Index climbed to 70.0 from 67.7 in July, reaching its highest level since October 2007 when a property bubble was near its peak. It later burst, bringing most of the country's banks to the brink and forcing the government to accept an EU/IMF bailout.

"Five years ago, Irish consumers were becoming increasingly nervous about the economic outlook," said KBC chief economist Austin Hughes. "On the evidence of recent data, those same fears are now beginning to slowly lift."

"The recent trend in consumer sentiment appears consistent with the prospect of a stabilisation in household spending, a development that could make quite a difference to the outlook for domestic economic activity."

The survey showed a marked easing in the number of consumers who feel things are set to get worse, with 34 percent believing the economy would weaken further in the next 12 months compared to 59 percent who thought so in July.

However, Hughes said the results did not suggest that any marked improvement in Irish consumer spending was in prospect in the months ahead, a call that was borne out by separate data which showed retail sales were down 1.5 percent year-on-year in July.

That put the pace of decline back to levels seen earlier this year after the drop in sales accelerated sharply to 6 percent in June. The government does not see consumer spending improving, even modestly, until 2014.

Such an improvement is desperately needed for Ireland to start eating into a debt pile set to peak at close to 120 percent next year and Hughes warned that speculation ahead of another austerity budget in December could undermine confidence.

"There is some risk that expectations in regard to household finances could be vulnerable to a notably increased level of speculation of late in regard to both the nature and scale of painful adjustments that could feature in the Budget in 2013," Hughes said.

"It remains to be seen whether a still modest improvement in the mood of Irish consumers can withstand the threat that budgetary changes could markedly reduce household spending power in the coming year."